A BC Election Prediction of Sorts Comes True

The Sauder School of Business at University of British of Columbia runs a website called Prediction Markets. Designed primarily as an educational tool, the prediction markets emulate real markets by allowing people to buy and sell future contracts on the outcome of elections. You take a position and then as other people take positions and the news ebbs and flows, you can buy and sell "bundles” of contracts, or buy and hold onto them to election day.

The School ran three markets for the 2017 BC Election which took place on 9th May. The first, the Popular Vote market, was based on the percentage of all votes won by parties. The second, the Seats Market, was based on the number of seats won by each party, while in the third, the Majority Government Market, you took a position on whether the election will result in one of three outcomes - an NDP majority, a Liberal majority or “Other Outcome” (i.e. a hung parliament/minority government).

When I opened an account in late April, the Majority Government market seemed to offer great upside potential with bundles of contracts for the Minority or “Other Outcome” scenario priced at a lowly 15c to 20c on the dollar. By comparison, bundles of contracts for an NDP majority were selling in the 40c range - with a Liberal majority favoured with prices in the high 40s. By the close of the markets on the 8th, the Liberal majority outcome was trending higher and after a slight bump up, the outlook for a minority government was dipping again (view the historical chart).

Since I took the view that there was likely to be a minority government I accumulated some 200 bundles of contracts for "Other Outcome" by the time the markets closed on Election Day. The risk with the Majority Government market is that your contracts would be worthless after the results came in if you picked the wrong outcome.

It paid off and my 200 bundles are worth $200.

I didn’t try the Seat Count Market partly because it was harder to predict and only dipped my toe in the water for the Popular Vote Market as it seemed fairly priced and there wasn't much to gain. In fact, I paid slightly too much for the small number of "BC Green's Popular Vote" futures.

Contracts for the Green vote share were being traded at around 17% at end of trading on 8th May, which was pretty much spot on when compared to the actual final election result.

How useful a predictive tool are these markets? In my experience, it showed that the market can be right (popular vote) and it can be wrong (didn't see a minority government coming). But, having quadrupled my initial $50 outlay, I can say it pays to be a contrarian.