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Predictit.org is a prediction market run by a university as a nonprofit enterprise. They say, "Our fees are necessary to cover the costs related to running this site." In order to have a positive expectation value for your bets on such a site, you either have to know something someone else doesn't know (Trump has cancer) or exploit the fact that other people act irrationally despite having good information (mispricing). It seems to me that a lot of the long-shot bets on this site are mispriced, including the following probabilities:

  • .15 that Pence is not the vice-presidential nominee
  • .11 that Biden drops out
  • .11 that Trump drops out
  • .07 that Hillary Clinton runs

Other people have made the same observation about long-shot bias on predictit.

I was thinking it would make sense to make a predictit account and take the underpriced high-probability side of some of these bets, making a small but significant profit with almost no effort. Then I looked at predictit's fee structure. They take 10% of your profits, and they charge you a 5% fee to cash out your money. That makes this type of bet a lot less attractive. For example, if I spend $93 on the Hillary bet, win, and then cash out, they pay me $94.33 after their fees. However, I could make many such bets at once (reducing my risk by diversifying), and keep reinvesting my winnings in more such bets. After, say, 10 cycles of this I would have made a 100% profit, and then I would cash out.

Does my analysis make sense, assuming I'm correct in thinking that these long shots really are irrationally mispriced? Are there other transaction costs that I'm not aware of?

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    Did you look at the order book and the date of the latest trade? These prediction markets can be illiquid, with the last trade happening so long ago that the prices you see are not necessarily the prices you can get. – Flux Jul 16 '20 at 4:18
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    I’m voting to close this question because questions about gambling or wagering are specifically off-topic. – Chris W. Rea Jul 16 '20 at 12:53
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These are all available (or deriveable) on betfair/smarkets/some bookmakers where the fees are low and the liquidity is huge.

Right now betfair has a ~6% chance that neither Trump nor Biden is president with thousands in the order book in all directions, and I'm guessing the missmatch between predictit and this will just be the spread/fees. Hillary to be dem candidate is at approx 3% and similar issues will exists if predictit is above this price after fees etc.

If you consistently see post fee prices on predictit that are above these exchange prices you can back them with quite a lot of certainty you have an edge as these exchange prices are very liquid/hard to beat and these types of basic bias have long been ironed out by the market participants on the big exchanges.

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  • Interesting, thanks. I'm in the US, so I can't legally use Betfair for this. IEM is legal here and does have much lower fees, but it doesn't have the large number of contracts that Predictit does. Betfair does have much more realistic-looking odds on long shots, such as 51 to 1 for Pence to be president. – Ben Crowell Jul 16 '20 at 13:49

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