Why relying on prediction markets in the elections may not be a safe bet 

The U.S. midterm elections are almost here.  

Pollsters have been busy asking voters whether they are likely to vote and who they plan to vote for. This data indicates that there are several close races in the House, with Democrats holding a clear edge. Many Senate races are competitive in what have been traditional Republican strongholds like Texas and Alaska. Prediction markets have also entered the midterm prediction arena.  

A question that candidates and voters may be asking is: Will pollsters or the prediction markets provide the most accurate forecasts? To assess this question requires a deep dive into both approaches. 

Polling has evolved over time, yet its basic premise remains the same: sampling a group of people from which a prediction about an election outcome can be drawn. A sample of 1,000 people typically results in a plus or minus three-point margin of error. This means that in close races, like one where candidate A is polling at 49 percent, Candidate B is polling at 47 percent, and 4 percent are undecided, the margin of error dampens the value of polls as a predictive tool.  There are many such races in this election cycle. 

Prediction markets take an entirely different approach. People trade contracts based on a yes/no question. The balance between yes/no bets determines the price of contracts and the effective odds of winning. Prediction market contracts are priced between $0 and $1, which reflects the market’s estimate of a candidate’s probability of winning. For example, if a contract trades at 60 cents, the market assigns that candidate a 60 percent chance of victory. Note that prediction markets do not provide........

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