The prediction market Augur, which has been running markets on the U.S. midterm elections, has spoken: It gives Republicans an 82 percent chance of retaining the Senate (with around $11,000 at stake), and Democrats a 65 percent chance of taking the house (with around $800,000 at stake).
Augur’s purpose, as with other prediction markets, is to aggregate bets and generate predictions. The basic idea is that when a group of people puts its money where its mouth is, it tends to arrive at more accurate conclusions than, say, political analysts can dredge up. The site has seen a surge of new users in recent days, who have been turning out to bet on the mid-term elections.
But can we trust it? Though it officially launched in July after three years of beta testing, the Ethereum blockchain-based prediction market’s track record is spotty. Augur’s bettors put Justice Kavanaugh’s chance of confirmation at 91 percent. But its users gave England a 63 percent chance at winning the 2018 FIFA World Cup. It didn’t. (Arguably, 63 percent leaves a cozy margin for error.)
Still, there's some reason to trust Augur's assessment. The midterm predictions align closely with centralized competitor PredictIt, which puts Democrats at 68 percent for the House and Republicans at 88 percent for the Senate. PredictIt has a decent(ish) track record. And, as Tom Kysar, Augur's head of operations, writes, Augur’s midterm market has “more volume/liquidity on some days than PredictIt,” whose Senate midterm market sits around $100,000.
Quenching Augur's Thirst
Liquidity, meaning the number of traders willing to place bets, is essential. Without a broad enough array of bets, prediction markets cannot pay out their users. Moreover, liquidity ensures traders can bet their true beliefs, and won't have to choose between a limited set of odds, making the resulting predictions more accurate.
Meanwhile, with enough money riding on a market, traders merely playing the odds are drowned out. Prediction market expert and former Augur advisor Robin Hanson, now an associate professor of economics at George Mason University, explains that, for this reason, it's better to tally the averages of several prediction markets. In doing this, the most accurate prediction will invariably emerge.
It’s worth mentioning here that, normally, Augur isn't this liquid. After three months since launch, it's just reached its 1,001st unique user. Indeed, 95 percent of the $800,000 sitting on that House market was supplied by two traders. Kysar, however, points out that, in terms of the market’s usefulness, this is irrelevant. It "shouldn't matter, as there's financial incentives for anyone to participate in the market and correct those odds."
Hanson, for his part, remains convinced that Augur's prognosis is worth taking seriously. "Augur is one of many markets where people can bet on this election, and its prices aren't that different from the others. So I'd focus on that overall market price, and give it a lot of credence."
Regardless of Tuesday’s outcome, Democrats will likely find solace in another, ongoing Augur betting market: Donald Trump currently has only a 41 percent chance at winning a second term.