Joe Biden, the Democratic challenger in the US presidential election in November, has finally picked his candidate for vice president: Kamala Harris.
Did the election of Harris, a Black and Asian American, improve Biden’s chances of winning? Or did it actually improve Donald Trump’s chances of being re-elected?
Depending on who you ask, the answer can vary significantly and an objective answer can be difficult to find. Polls or Admission assessments might help – the latest Survey aggregation Biden is at the top at 50% versus 41% for Trump while the rest of the voters are undecided.
But forecast markets, simple financial markets where the value of assets traded depends on results, such as B. who wins an election shown to be better predictors of election results in the longer term. Anyone can trade in these markets and companies can also use them to hedge against political risk. Something Companies even use forecast markets Predict political changes, the demand for new products or the feasibility of project deadlines.
Biden’s chances of winning the November election were bolstered in the prediction markets when he announced Harris as his opponent.
How forecast markets work
Forecast markets operate in the currency of the country in which they are based, for example in US dollars. In the US election, the markets trade a Trump asset that pays $ 1 if Trump wins after the election and $ 0 otherwise. The Biden Asset pays out $ 1 if Biden wins and $ 0 if it wins.
Forecast markets always rate these events between $ 0 and $ 1. This means that the price of an asset can be interpreted as the probability of an event occurring. So if the Trump asset is trading at $ 0.4, Trump has a 40% chance of winning. It doesn’t mean “Trump will lose the election” – it means that he is the underdog and is likely, but not certain, to lose. And the market quantifies these opportunities. However, regardless of the market price, once the election results are announced, the investor will receive either only USD 1 or USD 0.
If most traders believe that an asset is overpriced because the price exceeds the candidate’s chances, they will sell and the market price will fall. On the other hand, if most traders think an asset is undervalued, they buy and the price goes up. So the market prices are a prediction of the election result based on the Wisdom of the crowdA consensus forecast that tends to be better than the forecast of individual experts.
We know that the forecasted market prices match the underlying probabilities because empirically and laboratory Research has examined thousands of such market predictions, all of which have been summed up at a price of $ 0.4, and found that the predicted event underlying the asset, such as the selection of a particular candidate, actually occurred 40% of those cases. Similarly, for prices of $ 0.5, the underlying event occurred 50% of the time, and so on. The prices are well calibrated as probability predictions.
The largest forecast market The New Zealand-based US election is projected to have a 41% chance of Trump winning the election and Biden is a strong favorite at 59%. On August 11, the day Harris VP announced, Biden’s odds rose two percentage points while Trumps fell two.
The market clearly sees Harris as a good pick and increases Biden’s chances of winning the election. This day was also the day with the highest volume of trade in recent months, making it one of the key events in the campaign.
Before that, the price chart shows that Trump’s odds were down significantly in June. In early May, the market still viewed Trump as a favorite, with Biden not impressing during the main Democratic race. But since the double crisis of the COVID-19 pandemic and the protests against Black Lives Matter (including Trump’s reactions to it) became the top priority of US politics, Trump has steadily lost ground, with Biden overtaking him as the favorite.
What events led to this reversal? On May 28, Trump threatened to call in the National Guard to confront the Black Lives Matter protesters. Asking Twitter to label the tweet as “glorifying violence”. June 1st Protesters were forcibly dispersed so that Trump could go to a church for one Photo op. The prices at the time show that within a few days Trump lost about five percentage points while Biden won five, which changed the difference by ten percentage points in favor of the challenger.
COVID news also had a significant impact. On June 24th and 25th, Trump lost another four percentage points and increased the gap to Biden by eight. During those two days, Anthony Fauci, director of the US National Institute of Allergy and Infectious Diseases, testified that the The US has a “disturbing” increase in new casesThis shows that the US has not been able to handle the crisis well. In late July, Trump rebounded a few percentage points as attention shifted slightly to his anti-China rhetoric and the sale of the Chinese social media platform TikTok.
But the race isn’t over yet. Awards in the 2016 elections most moved in the two months just before the election. Trump followed Hillary Clinton throughout the campaign in prediction markets and was only seen as a favorite on Election Day – proof that the underdog can bounce back. Despite Trump’s poor position, he could still gain some ground.