Prediction markets predicted the outcome of the election more accurately and faster than polls or other forecasting methods, just as expected from decades of research. In this election, however, many people have discounted the prediction markets because of the high turnover Polymarket. Paul Krugman, for example, he wrote:
Ignore the prediction markets, which are thin and easy to use.
None of this was true but maybe that was par for the course. Even some experts in the prediction markets, began to waver under the influence of “whale” illusions. But this story was always moving. What was the mind supposed to be?
Few would explain this theory directly—perhaps because it sounds absurd when spelled out. The idea seems to be that the whales have changed the market volatility from 50:50 to 40:60, hoping that this will drive more people to vote for Trump. Really? Were voters in Pennsylvania watching Polymarket to see who they voted for? In the decision market, deception may be desirable to the whale (although it is unlikely to succeed), but in the prediction market, this situation seems questionable: a) people will need to know about these markets, b) they will need to care about the possibility. shifts in these markets (as opposed to voting means how their family and neighbors were voting), and c) this would have to be an effective way to use money to influence votes compared to a number of other ways to influence voting. Each step seems questionable.
Alternatively, maybe the whales were just wasting money, “remembering” millions of dollars? Is that what whales do? The memeing theory makes a lot of sense to many small traders, not a few whales. Or maybe the whales are aiming to stir up excitement among the minnows, hoping to build momentum before cashing out. However, small traders are not interested in raising prices and exiting is risky; the same power that whales have to drive prices up can quickly drive prices down, making profitable exits challenging. In short, although unlikely, the idea of whale-driven fraud in the prediction markets was far-fetched.
In fact, we now know that the biggest whale of all was moving the markets to accuracy (as opposed to his interest in method). In an excellent WSJ article we read:
A mysterious trader known as the “Trump whale” will reap a profit of almost 50 million after running the table in a series of strong bets tied to the presidential election.
Not only did he see Donald Trump winning the presidency, he went on to say that Trump would win the popular vote—an outcome that many political observers considered impossible. “Théo,” as the trader called himself, also bet that Trump would win the “green wall” states of Pennsylvania, Michigan and Wisconsin.
Now, Théo is set for a big payday. He made his wagers on Polymarket, a crypto-based betting platform, using four anonymous accounts. Although he declined to be identified, he has been in contact with a Wall Street Journal reporter since an October 18 article drew attention to his bet.
In multiple emails, Théo said his bet was actually a bet against the accuracy of polling data. Describing himself as a wealthy Frenchman who had worked as a trader at several banks, he told the Journal that he began using his math skills to analyze American votes over the summer.
Here are the most notable. Theo did his voting using a different method!
The polls failed to account for the “shy Trump voter effect,” Théo said. Either Trump supporters were reluctant to tell voters they supported the former president, or they didn’t want to participate in the election, Théo wrote.
To solve this problem, Théo argued that voters should use what are known as neighborhood polls that ask respondents which people they expect their neighbors to support. The idea is that people may not want to reveal their preferences, but they will indirectly reveal them when asked to guess who their neighbors plan to vote for.
…In an email, he told the Journal that he commissioned his own pollsters to measure the neighborhood’s results, using a senior pollster he declined to name. The results, he wrote, were “mind blowing for Trump!”
Théo declined to share those surveys, saying his contract with the surveyor required him to keep the results confidential. But he argued that American voters should use a neighborhood approach in future surveys to avoid another embarrassing miss.
So, a big win for prediction markets, Polymarket and Robin Hanson of GMU, the father of prediction markets, whose work directly influenced the creation of Polymarket.
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