Considering the significant lead Adrian Dix's B.C. NDP still holds over Christy Clark's B.C. Liberals in the polls, the outcome of the May 14 election may seem like a foregone conclusion. Indeed, traders on the Sauder School of Business Prediction Markets put the probability of the NDP winning the election at roughly 90 per cent.
Forecasting election results is not as easy as it looks, though. Opinion polls ask people who they would vote for if the election were held today. Of course, as new information about electoral platforms and candidates emerge, opinions evolve. Opinion polls do not capture trends and momentum quickly. Combining results from multiple polls provides a more accurate picture and compensates for biases in individual polls and different polling methods.
Prediction markets work on a different principle: They ask people who they think will win the election and which party will get how many seats in the legislature. Backing their opinions with their own money, forward-looking traders are often quite good at capturing trends and momentum that is forming during an election campaign. Prediction markets are not perfect either. Low trading volume can impede this exercise in "crowd-sourcing," and the market mechanics slightly favour low-priced "long-shot" contracts.
UBC's prediction markets launched in February, and have been tracking the parties' fortunes over the past eight weeks. Nearly 120 traders have signed up and invested more than $12,000. So what do these traders predict?
The markets consistently predict an NDP win, with the odds of an upset at one in 10 or less. More interesting is how our traders predict the distribution of seats in the legislature. According to them, the NDP can count on 58 or 59 of the 85 seats, and the B.C. Liberals on 19 or 20. Two independent candidates are also expected to be re-elected.
Traders also seem to believe that candidates from the B.C. Green Party and B.C. Conservatives will enter the legislature for the first time. While our first-past-the-post electoral system makes it difficult for small parties to get seats, the Green Party can count on pockets of support on Vancouver Island, while the Conservatives may benefit from concentrations of voters in rural areas. Traders predict one or two seats for the Green Party, and four seats for the Conservatives.
The popular vote share market mostly tracks the polls, but at times, it seemed to deviate quite noticeably from the polling numbers. It turned out that a single trader bought up shares of one party even at prices that would seem rather at odds with the polls. Prices in prediction markets can be volatile when there is not a lot of trading – strong positions of some traders are profit opportunities for others.
So which forecasts should you trust – the polls, the prediction markets, or the pundits? The answer is simple: They all have their pros and cons. In the end, it's your opinion that counts when you cast your ballot on May 14.
Werner Antweiler is a professor of economics and the director of the Sauder School of Business Prediction Markets at UBC.