The myth that all crowds are equally wise needs to die. But the former president claiming that sportsbook odds predicted his win is a whole new level of terrible. It brings the worst misunderstandings about the wisdom of crowds to an already toxic political environment. So, once and for all, it’s time to kill the myth that sportsbook odds are a credible election prediction formula.
Anyone who’s tempted to bet at PredictIt should keep that in mind for the 2022 Midterm Election. Here are the current odds and how to bet on the 2022 Midterm Elections.
Wise Crowds Are Not An Election Prediction Formula
Sportsbook odds do not make predictions.
Sportsbook odds are initially set with the goal of reflecting public opinion about an outcome. In sports, that may be a point spread, over/under, or win/loss. Then, the odds go public and are adjusted based on the activity of early sharp bettors. Sharps are good at finding odds first and taking advantage of the gap between sportsbook pricing and a sharp’s own pricing. Those are two of the qualities that set sharps apart from the rest of us (and it’s why a lot of our sports betting promo codes are themed around “sharp” betting).
As the sharps place their bets, the sportsbooks adjust the odds to mitigate the risk of a payout that’s significantly larger on one side than the other.
The few sportsbooks that price odds this way are called market makers. They’re the ones who “set” the odds that the other commercial books copy.
So, in their earliest moments, sportsbook odds are set to reflect public opinion to give sportsbooks the best chances of attracting an equal amount of money to each side of the bet. Then, sharp bettors move in to take advantage of opportunities they find in these early odds. Market-making books adjust their odds in response. Then the commercial books copy the odds and the public makes their bets.
Sportsbooks make no predictions at any stage of the process. They respond to public opinion and public money.
Prediction markets sound like promising ways to predict the future. However, the wisdom of crowds only works if crowds are wise. Investopedia summarizes the four requirements for wise crowds:
- Diverse opinions
- Opinions uninfluenced by the rest of the crowd
- Opinions formed by individual knowledge
- Ability to come to a collective decision by “aggregat[ing] individual opinions”
That means that making decisions based on someone else’s polls is an unreliable way to make winning bets. A group of bettors can’t bet based on political affiliation and expect to be consistently right, either.
These are among the biggest reasons that political prediction markets can be poor predictors of elections. If most of a market’s bets are based on the same set of polls, then the prediction market will just reflect what those polls say. Or, if most of a market’s bettors make their bets based on political affiliation, the odds will reflect one political faction’s opinion rather than political reality.
If that second scenario sounds far-fetched, that’s exactly what happened in 2020.
How Money Moves Odds
In a perfect world, sportsbooks would have roughly equal money on both sides of all their bets. But our world is imperfect, and sportsbooks can have lines where 80% of the money is on one side. At that point, sportsbooks want two things: to be on the winning side and to limit their liability on the underdog.
When a sportsbook starts to get a lot of money on one side, they’ll adjust both sides of the line. They’ll lower the odds on the popular option so their likely payout is smaller. Sportsbooks will also increase the odds on the less popular option to draw bettors away from the more likely option. This is how sportsbooks remain profitable when 93% of their customers’ money goes to one side.
Extreme Odds Movements In 2020 Election Markets
In the United Kingdom, election betting is legal. Naturally, those sportsbooks offered lines on the 2020 Presidential Election. The odds opened with about a 65/35 split favoring Biden to win. As Democratic mail-in votes began to be counted, Biden gained momentum in the electoral college.
In response, Trump bettors poured money into bets reflecting another Trump upset. According to Vox, 93% of bettor money was going to a Trump win at one point during this surge. Sportsbooks had to respond by lowering Trump’s odds dramatically and increasing Biden’s odds dramatically. So, even though polls began to project Biden’s win, sportsbook odds were the equivalent of a 97% chance of a Trump win.
However, that 97% chance came from the odds conversion from odds to implied probability. 97% would’ve converted to odds of about -3225 — a hair over three cents for every dollar bet. (Biden’s odds probably would’ve been somewhere above +3233 — $33.33 for every dollar bet.)
Those odds moved in response to the astronomical amount of money that Trump bettors put on him to win despite clear data that he was losing. Sportsbooks never predicted that Trump would win. They tried to minimize the amount of money they’d have to pay out in the unlikely event that Trump won.
The Only Election Prediction Formula
The only election prediction formula we have is the Electoral College. There’s no algorithm that predicts each Presidential Election. (Alan Lichtman’s 13 keys come close, but only work on elections after 1984. Foreign election interference also breaks the 13 keys model.) The only way to tell who wins the election is to count each state’s votes and see how the Electoral College votes are awarded.
Sportsbooks have no say in who wins. They ride the election night wave like the rest of us.