Prediction Markets in a Polarized Society

Almost four weeks have elapsed since election day on November 3. The race was called on November 7, and the transition belatedly initiated on November 23. Georgia, Michigan and Pennsylvania have all certified their vote totals, with Wisconsin and Arizona scheduled to follow within days. Many lawsuits challenging the results have been filed, but all have failed quickly and decisively.

And yet, prediction markets still give the incumbent a one-in-eight chance of being declared the winner:

There’s a position size limit of $850 dollars per contract in this market, which also happens to have hit a limit on the total number of participants. But dozens of other contracts are available that reference essentially the same outcome, and offer about the same prices. Here is one example:

For someone convinced that Biden has already won, it would not be difficult to bet $100,000 for a guaranteed 15% return within a matter of weeks. Even taking fees and taxes into account, this would far exceed returns from other investments perceived to be safe.

For those already skeptical of prediction markets as forecasting mechanisms, this just further reinforces the view that they are unreliable. Nate Silver, for instance, considers these prices to be insane, sustained by traders who are dumb, delusional, and detached from reality.

Perhaps so. But a recent survey found that 73% of Trump voters believe that their candidate actually won the election. This amounts to tens of millions of people. In believing that the results will be overturned by state legislators, courts, or perhaps even brute force, they are simply taking their cues from the president himself, his lawyers, and several senior administration officials. These are sources that ought to be trustworthy, and it should not be surprising that they are indeed trusted by so many.

What prediction markets are revealing to us today is the extent of the chasm in beliefs held by Americans. Considerable evidence has accumulated over the past four years of increased political polarization, amplified by social media, and of families ripped apart as relationships shatter. At root are differences not just in political preference or ideology, but in firmly held beliefs about simple statements of fact.

Meanwhile, opportunistic politicians are fanning the flames with deliberate falsehoods. A particularly egregious recent example involves Pennsylvania state senator Doug Mastriano, who falsely claimed that more mail-in ballots were received in his state than were requested by voters, by comparing requests from the primary with receipts in the general.

People actively seek information that largely confirms their existing beliefs, and social media platforms accommodate and intensify this demand. Prediction markets play an interesting and usual role in this environment. They encourage people with opposing worldviews to interact with each other in anonymous, credible, and non-violent ways. In a sense, they are the opposite of echo chambers. A market with homogeneous beliefs would have no trading volume, or would attract those with different opinions who are drawn by what they perceive to be mispriced contracts.

While most online platforms facilitate and deepen ideological segregation, prediction markets do exactly the opposite. They provide monetary reinforcement to those who get it right, and force others to question their assumptions and predispositions. While best known as mechanisms for generating forecasts through the wisdom of crowds, they also bring opposing worldviews into direct and consequential contact with each other. This is a useful function in an increasingly segregated digital ecosystem.