Undercover Economist

Tote that vote

“Put your money where your mouth is.”

The old taunt reflects a deep economic principle: talk is cheap, but if someone is willing to risk money, it means they’re serious. Put the principle into action and you realise that electoral forecasters should pay as much attention to the betting odds as to the opinion polls. That is because when money is on the line, informed people, perhaps including insiders, have an incentive to turn their knowledge into cash by making big bets. In the process they make the odds more accurate. And of course, there are several reasons to lie to pollsters but no reasons to make a money-losing bet.

Or are there? Imagine you’re a candidate in the US presidential primaries. One of the big selling points is electability: “If you choose me, I’ll beat the other party’s candidate.” It might be worth placing a few money-losing bets if they made you look electable.

This may be more than a hypothetical scenario. The economists Justin Wolfers and Eric Zitzewitz have pointed out that Hillary Clinton’s chances of becoming president, as predicted by one betting market, InTrade, started to climb dramatically mid-May, topping 40 per cent after months of fluctuating between 20 and 30 per cent. Her odds of winning the Democratic nomination stayed around 50 per cent, implying that if nominated, her chance of then winning the presidency would be about 80 per cent. You can’t get much more electable than that.

So is someone in Hillary’s camp trying to boost her chances by manipulating the market into a self-fulfilling prophecy? Or is it a rival candidate trying to make her look like a manipulator?…

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