Election 2020: What betting markets can tell us about Trump vs Biden

Updated 29 September, 2020

With the US election coming at a time when the country seems more divided than ever in recent years, this election will be closely watched, not only by the citizenry but by people the world over. Say what you will about the incumbent, President Donald Trump, but his steadfast proclamations that all is well seem to be satisfying his ardent support base, while those who stand elsewhere on the political spectrum watch from afar, aghast at his rhetoric.

This first debate will focus on six topics, some of which have the potential to spark electoral tinderboxes, including the current Covid-19 situation (according to World Health Organisation statistics, the USA has seen almost 7 million cases and over 202,000 deaths - placing it atop the global "leader" board); the Supreme Court, a topic with far-reaching consequences following the death of liberal stalwart Ruth Bader Ginsburg and the Republicans' rush to fill her seat before 3 November; and "race and violence in our cities", at a time when calls to end institutional racism are at their loudest, and at times most violent, in decades.

For this election, Cloudbet is tracking price movements closely as part of its comprehensive politics offering that allows customers to bet on the election winner, as well as on state-by-state outcomes by party. With 270 marking the magic Electoral College number, anyone looking to bet with bitcoin on the US election should check out our electoral college map, which gives users an instant representation of which party is likely to win, based on the real-time odds presented for each state.

The election map significantly amplifies what’s on offer at Cloudbet for players seeking the best odds for bitcoin politics betting from the comfort of their homes or on the go. Opening an account has never been easier - all you need is a credit or debit card to get started.

It is not the purpose of this post to explore the election issues, but to note the fact that more and more people are looking to betting markets to fill the void left by traditional pollsters given the shock results that they failed to indicate in some major voting events over recent years - including the 2016 US election.

The Cloudbet map offers something pollsters can't - a real-time gauge of public opinion.

While pre-voting polls claim to provide a snapshot of the vox populi, and exit polls a snapshot of how events may unfold, one thing has been made very clear if we look back at three major votes in recent years - the 2016 US election; the UK's 2016 referendum on EU membership, aka, the Brexit referendum; and the UK's 2017 general election - and that is, quite simply... that the polls can't be trusted.

The pollsters got it wrong

Opinion polls have been the mainstay for measuring election sentiment, but their track-record in recent years has meant that they are increasingly treated with caution. Opinion polls were catastrophically inaccurate in the 2016 US presidential election, the 2016 Brexit referendum and the 2017 UK general election.

With so much doubt cast on the usefulness of what was the standard barometer for pre-election sentiment, betting markets - in various forms - are increasingly filling that role.

But are they any more reliable, and what does that mean for bettors looking to gain from the uncertainty?

2020 US election set to break betting records

It is expected that betting on the 2020 US presidential election will eclipse that on any political event in history. Disregarding the issues of the day, Donald Trump the personality on his own is already expected to be a huge draw.

A political maverick - who with great understatement, shall we say, divides opinion - Trump was at one time earlier in his administration predictable in his unpredictability.

Today, in election mode, he has become steadfast in hammering home the Trump line: The economy is the strongest it's ever been, stupid; the pandemic is really no big deal; China be damned; black lives matter, but so do all the others, and any related social disorder must be handled by a law-and-order president. Not only has he Made America Great Again, but he's the only one who can Keep America Great.

And up against him, Joe Biden. A candidate not without fault or issues himself.

Biden has taken advantage of the pandemic to present himself as the mask-wearing, stay-at-home, more socially responsible (and distanced) candidate - in stark contrast to the president's refusal to sport protection, stay home in favour of hitting the golf course, and happily attend his own big-crowd rallies.

Biden therefore represents the face of responsible, versus irresponsible office.

But he is older than the president, at 77-years old; has a chequered health record which has raised question marks (both factors no doubt play in Trump's Sleepy Joe nickname); been embroiled in his own shady political scandal involving his son, Hunter; and, it has to be said, seems to have aged tremendously in the four years since he provided President Obama with a relatively safe pair of hands as his number two.

If we broaden the lens to look at the other topics open for debate in Round 1, the Trump and Biden records, the economy (of course; but let's not forget that may bring the China debate into the fold) and the integrity of the election - be that the furore over mail ballots or the now old story/fear of Russian influence - the list of themes that could decide the election - by derailing either candidates efforts - are at the very least sure to make the presidential debates box-office viewing.

So what can the US election betting odds at Cloudbet tell us about the potential outcome, and how reliable are betting markets as opposed to polls?

US election betting odds

Cloudbet offers markets on the outright winner, which party will take any given state, and a few, let's say lighter-hearted, prop markets as well for the first debate.

As of the time of writing, the outright odds on Donald Trump are 2.07 and on Joe Biden, 1.79 (as always, these are of course subject to change).

If you aren’t familiar with betting odds, we can turn that into something much more useful - the implied percentage chance winning. Here is how that is calculated.

Calculating implied chance from the odds

Odds represent the likely frequency of an unknown event. You can turn these odds into an implied probability – in other words, the chance that the odds are based on – by doing the simple sum (1/decimal odds)*100.

For Trump's current odds, that means (1/2.07.)*100 = a 48.3% chance.

For Biden's current odds, that means (1/1.79)*100 = a 55.9% chance.

If you're wondering why these total more than 100%, this reflects the fact that bookmakers add margin into their odds.

Should we trust the predictive accuracy of election betting odds?

The question that anyone unfamiliar with betting will ask is ‘Why should we put faith in betting odds?’

To answer this, let's visit the history books... and specifically, a livestock fair in Plymouth, England in 1906, attended by Sir Francis Galton.

Galton, in observing a competition to guess the weight of a butchered ox, uncovered what is known as the wisdom of the crowd phenomenon.

Wisdom of the crowd is the process by which dispersed, independent opinions coalesce around the most accurate assessment of an unknown variable - in that case, the accurate weight of the ox - in our case, the winner of 2020 presidential election.

"Wisdom of the crowd" is the process by which dispersed, independent opinions coalesce around the most accurate assessment of an unknown variable

No-one guessed the exact weight of the ox, but Galton calculated the median of guesses as being within 0.8% of the answer, commenting “the middlemost estimate expresses the vox populi, every other estimate being condemned as too low or too high by a majority of the voters.”

A betting market acts as a vox populi by measuring the willingness of participants to risk their money predicting the outcomes of events based on quoted probabilities, presented in the form of odds.

Just as in the competition Galton witnessed, the best estimate is reached by adjusting the odds in proportion to the aggregate volume of wagers bettors are willing to risk on either side.

So US election betting odds represent the vox populi of the participating bettors, and the same for every other type of betting market, or prediction of an unknown which applies to the price of bitcoin or guessing the number of candies in a jar. But they are not without their limitations, which are important to understand.

Limitations of betting odds as predictors of election outcome

Though betting markets are very good indicators of underlying probability, they aren’t perfect, and going back to Galton’s experiment we can illustrate why in certain circumstances they should be treated with caution.

The accuracy of guesses of the ox’s weight would be proportional to the number of entrants in the competition - the more guesses, the more accurate the median.

Equally, from a betting perspective, the number of bets is important, but not all bets are equal in terms of their influence on the odds.

Ten $5 bets on Trump are not the same as one $1,000 bet on Biden. A shorthand way of describing this is ‘Money Talks’. Betting markets react to the volume wagered rather than the volume of wagers. So they are not a proxy for votes, they are a proxy for sentiment as represented by the willingness to risk money.

So if money moves markets, should that opinion always be trusted? If it is an experienced political bettor it has much more weight than a wealthy casual bettor placing a large punt, but you will only see the output - the odds - and not know the volume of bets or know anything about who is behind them.

This is true for all betting, but politics is niche compared to mainstream sports, and for all the reasons discussed here, is less likely to be a market for sharp bettors.

The importance of diversity

In the case of US election betting, there is no certainty that those betting are drawn from a wide audience representative of the electorate. For a start, Cloudbet don’t accept US customers, and the same is true of the majority of bookmakers worldwide.

So is the behaviour of bettors for POTUS markets outside the US a useful proxy for actual participating voters?

This is the first US election since the relaxing of betting regulations in America, so there is an argument that the betting markets will be more robust than in the past, as actual voters will be helping to form the betting odds. And the odds at Cloudbet don’t exist in isolation from bookmakers elsewhere; there may be some difference in the odds, but if there is enough liquidity - which should certainly be the case if, as expected, records are broken - then markets should be efficient, and therefore exist within a relatively small deviation.

Even if US bettors are helping shape the market, are they representative of US voters? This is unlikely to be true. Betting tends to be indexed heavily towards men aged between 18 and 40, which clearly doesn’t represent the whole electorate.

Taking this argument further, even if those US bettors truly represented the US electorate, given the way that the election works, what the betting is actually gauging is the likelihood of Trump or Biden winning in a handful of key swing states. Even if every citizen of California were to place a bet on the outcome, would that provide a more accurate assessment of the outcome in Florida, given California has consistently voted Democrat every year since 1992?

This illustrates that the way elections and referendums are decided is far more complex than one may expect. Rather than a first-past-the-post system, which would be easier to predict, the US uses the anarchic Electoral College system, where a presidential candidate requires 270 votes to win.

The crowd is only as wise as its participants, and by corollary, the accuracy of betting markets is determined by the domain knowledge of those participating

Information and disinformation

The idea of knowledge is crucial in the Galton example. If the crowd guessing were children, not farmers, the outcome would have been very different. The crowd is only as wise as its participants, and by corollary, the accuracy of betting markets is determined by the domain knowledge of those participating.

Knowledge depends on information. In an NFL football game, for example, the result is unknown but the majority of the relevant information is quantitative (previous results, in-game data, touchdown expectation, weather, attendance) and in the public domain, and so a reasonably accurate assessment of the underlying probability of the three outcomes (win, lose, tie) can be quickly reached, especially given that this data is fed into complex models which quickly improve the market’s efficiency.

This means that what are called the ‘opening odds’ are pretty accurate, but as time progresses those very informed bettors who have access to proprietary information (not in the public domain and derived from private networks or complex models) place bets and the market moves to maximum efficiency closer to kick-off. This is why ‘closing odds’ are always more accurate than opening odds.

But an election isn’t like a football game, because it is so hard to take a quantitative approach. If you built a model (like the NFL example), what inputs would you decide as relevant in determining the winner, and how would they be weighted?

Should you use data from previous elections, even when they happen so infrequently and the context is completely different - as are the candidates as well as the electorate itself, with new voters entering the system as they reach 18 and a similar proportion dying.

With all these challenges it is easy to see why polls have been the go-to yardstick, and increasingly, focus groups in marginal/swing areas, where the results are closely guarded.

We are in an era of ‘big data’, so you might think that a big enough computer could crack this nut, and though Google Search Results and trending Twitter hashtags can certainly provide insights into what people are thinking and saying, digital media has actually been used more to shape public opinion rather than to measure it.

The influencing of public opinion via social media and the spread of disinformation is a huge can of worms in relation to this discussion. Essentially, the ability to influence public opinion via ‘fake news’ is another input into any election betting assessment that is hugely problematic to assess, unless you simply assume all sides are equally capable of doing it - in which case there is no bias.

Information cascades

As mentioned above, opinion polls called three of the biggest elections in recent memory completely wrong. And we're not claiming that betting markets did much better. In isolation, one of those results wouldn’t necessarily prove anything other than an unlikely result; in any circumstance the favourite will sometimes lose. However, three upsets of that magnitude in such close proximity may suggest something else.

Given the absence of solid data with which to base predictions of election outcomes, the market tends to focus on a set of assumed truths - say, for example, that women or minority voters won’t vote for Trump; or, in the case of Brexit, that undecideds would be more likely to align with the status quo.

Without being challenged, these ideas become unchallenged truths, fuelled by the media, and can often prove false.

That process is known as an information cascade, and was especially relevant in the 2016 US election where so many preconceptions about the electorate’s view of the now 43rd President of the United States, Donald Trump, were completely smashed.

This is evident from the fact that Trump was a massive underdog to win in 2016 throughout the entire election process - and even once voting was underway. The market only turned when the result started to come in from Florida. Up to that point, the prevailing narrative was that Hilary Clinton was going to win comfortably - and clearly that narrative was misguided.

The relevance of timing

Based on the points raised so far, there is plenty of reason to feel that predicting elections is fraught with danger, and we have not yet discussed the issue of timing. In the three events highlighted as examples of how out of touch polls (and to an extent, betting markets) have come with genuine voter sentiment, timing was a crucial factor.

The betting markets were unable to accurately account for floating voters who made their mind up on the day, and first-time voters were an even greater unknown. Both groups were likely more susceptible to the influence of messages closer to voting.

The 'prostitute factor'

Leaving the best to last, one of the reasons that bookmakers themselves are wary of election betting markets is something rather bluntly referred to as the ‘prostitute factor’ - namely, the danger that at any time a skeleton might fall out of a candidate’s closet and completely derail their chances.

It doesn’t necessarily have to relate to sex, but was especially relevant for Donald Trump in 2016 - yet the result was still what it was.

What was so surprising was not the allegations themselves - which became so numerous as to lose impact - but that his voters didn’t care. This doesn’t necessarily apply going forward, of course - but because there are no clues ahead of time, they can make election markets a potential minefield for bookmakers who are used to markets moving by degrees, not wild swings.

No one really knows

As an example of how badly out of whack opinion polls can be, let's look back across the pond to the the UK and the 2017 general election:

“Opinion polls had consistently shown strong leads for the Conservatives over Labour. From a 21-point lead, the Conservatives' lead began to diminish in the final weeks of the campaign. In a surprising result, the Conservative Party made a net loss of 13 seats despite winning 42.4% of the vote (its highest share of the vote since 1983), whereas Labour made a net gain of 30 seats with 40.0% (its highest vote share since 2001 and the first time the party had gained seats since 1997). This was the closest result between the two major parties since February 1974” (https://en.wikipedia.org/wiki/2017_United_Kingdom_general_election).

We will never know definitely why the outcome was so different to the pre-election polling and betting markets. Much of the supposed reasoning is really purely conjecture, and in essence, all elections are.

But this is actually good news for bettors because bookmakers don’t like uncertainty and struggle to model it accurately, meaning it's not easily reflected in their odds. Uncertainty, a fluke, a stroke of luck - these things are not necessarily friends to a bookmaker (of course, there's always the chance these things may on occasion work in their favour too - it's a two-way street after all).

If you are interested in bitcoin betting on the US election, perhaps the best advice is to urge you to step outside of your echo chamber, ignore opinion polls, absorb as many diverse opinions as possible and keep your popcorn handy for results night - as no one really knows what the outcome will be.

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