COMPARING PREDICTION MARKET PRICES AND OPINION POLLS IN POLITICAL ELECTIONS

Abstract

The basic idea of this note is simple. Fundamentally, opinion polls are estimates of the final vote shares of candidates. These estimates are characterised by uncertainty. This uncertainty is the link between prediction market prices and the opinion polls. The simple reason for this is that the price in a prediction market indicates the probability that a given candidate will win a share of the vote greater than a given threshold (usually 50%).As soon as one is able to estimate the distribution of the final possible share of the vote given an opinion poll, a comparison is possible between the opinion poll and the prediction market.  The estimation of this distribution is the main (non-trivial) problem of this exercise.