I have seen mentioned on these boards, as well as Nate Silver’s 538 site, that the wagering site Betfair is a place where people place bets on the outcome of the election (as well as sports, etc.)
So out of curiosity only (because I’m not really a betting kind of guy) I checked out the data on the site and can’t make heads or tails out of the data presented. To be repetitive, perhaps because I’m not a betting kind of guy.
I do however think there is some wisdom of the masses, especially when it comes to betting hard earned money. So I’d like to be able to understand what exactly this data is saying.
For this post I’m going to use Donald Trump’s current line for example purposes. Trump currently has a back price of 12 and a lay price of 13.
A back price of 12 means that you can place a bet for Trump to win for $1 and if he wins you will win $11 plus your original $1 for a total of $12.
If you wish to calculate the implied probability of Trump winning from this information solve the following equation for p:
p * 11 = (1 - p) * 1 => p = 1/12 ~= 8.3%
A lay price of 13 means that you can place a bet against Trump to win for $12 and if he loses you will win $1 plus your original $12 for a total of $13.
Similarly the implied probability (of Trump winning here) is:
p = 1/13 ~= 7.7%
The difference here is because of the vig. The house always gets it cut.
If you were to calculate the the implied probabilities for all of the candidates in this manner and add them up, you would get a number greater than 100%. This is more evidence of the vig. To get the ‘true’ probabilities one would normalize all the implied probabilities so they would sum to one.
Betting against The Donald -
that sounds like fun, and also a decent return - 7.7% for one year doesn’t sound bad.
I wonder - when would they payout? If he doesn’t get the nomination or otherwise drops out, is the bet collectible?
Should probably also go check out the site, but wondering if there are any income or similar taxes payable - I have a $100,000 odd that I wouldn’t mind dropping into such a proposition
The difference between the lay and back is NOT the Betfair house vigorish; it’s the spread, like on the NYSE, caused by private parties waiting for each other. There is a separate commission charged by Betfair; payoffs shown at the site are not net payoffs.
Funds must be placed in escrow; if you Lay $12 to win $1 and wait one year to win you’ve lost the opportunity to use that $12 for something else during that year. A proper analysis would need to consider the time value of money. This is complicated when making multiple mutually-exclusive lays – I assume Betfair has some algorithm to determine what net deposit is required.
Predictwise posts odds it derives from Betfair and other bookmaking sources and is probably an easier way to determine “what markets think.” It does seem to force the chances to sum to 100% exactly, which would make sense if all likely outcomes are listed. But they aren’t – Biden could easily become the Democratic nominee due to unforeseen circumstances; I think the chance of that is much greater than that O’Malley will be the nominee.
Yep - 1/12 return is 8.25% right? Not a bad interest rate. Less whatever the commission is of course.
Bigger thing in my book is foreign exchange risk…
Depends of course what you think the chances of Donald winning - from what I see they’re close enough to zero to make it worth it
Thanks to all for your responses. I appreciate it.
And septimus, your link to predictwise is very helpful to me. Since I don’t plan on doing any betting, this is exactly what I was trying to figure out. And predictwise has done all the work for me.
Yeah, I should have mentioned PredictWise. I know I have linked to it in a number of threads, but it slipped my mind this time.
bengangmo, I don’t know where you live but I don’t think you can bet at Betfair legally from the US. There is, however, PredictIt which allows bets from 48 states (not Washington or Nevada).
