Some events are like elections: it was obvious that some big political news would break on Election Day, we just had to wait to find out what exactly would happen. Others are like market crashes: you might know in principle they’re a thing that can happen, but you don’t really expect any particular day to be the day one happens, so they seem to come out of the blue. As it turns out, for one of the largest crypto exchanges the day of the crash also happened to be Election Day.
FTX.com is facing a bank run sparked by competitor Binance tanking the price of the token that backed some of their assets. Customers are having issues withdrawing their money, Binance has withdrawn its offer to bail out FTX by taking them over, and bankruptcy seems likely. Supposedly this doesn’t affect Americans using FTX US, but I’d be nervous about any funds I had there, or indeed with funds in any centralized crypto exchange or stablecoin (Tether and even USDC seem to be having issues holding their pegs). All this was especially shocking because many considered FTX founder Sam Bankman-Fried one of the most trustworthy people in the often sketchy world of crypto. He was always meeting with US regulators and lawmakers, and seems not to be motivated by greed; he had already begun to give away his fortune at scale.
After any surprising event like this, some people claim it was actually obvious and they saw it coming (despite usually never having said so beforehand), while others start looking back for warning signs they missed. The most interesting one is something that shocked me when I first heard it March, but I never considered the risk it implied for FTX until the crash:
Going forward, red flags to watch out for seem to be topping a list of youngest billionaires (as Elizabeth Holmes also did) and buying naming rights to a stadium.
In contrast to this crash, the election happened right when we all expected, and at least largely how I expected. Like markets, I underestimated Democrats a bit; polls overall were impressively accurate this year, though they of course missed on some particular races. Votes are still being counted, and as of now we don’t even know for sure which party will control Congress (PredictIt currently gives Democrats a 90% chance in the Senate and a 20% chance in the House). But here are some early attempts to assess forecast accuracy. As I said, some polls were quite good:
Some polls weren’t so good, which means its important to weight better pollsters more heavily when you aggregate them. Some attempts at that were also quite good:
Oddly, some no money (Metaculus) / play money (Manifold Markets) forecasting sites seem to have done better than the real-money prediction sites:
This is my last post before the US midterm elections on Tuesday, so I’ll leave you with a prediction for what’s coming.
Who is the best predictor of elections? Nate Silver at FiveThirtyEight has had a pretty good run since 2008 using weighted polls. Ray Fair, an economics professor at Yale has a venerable and well-credentialed model based on fundamentals. I typically favor prediction markets, because they incorporate a wide range of views weighted by how willing people are to put their money where their mouth is, and traders are able to incorporate other sources of information (including predictors like FiveThirtyEight). But which prediction market should we trust? There are now many large prediction markets, and the odds often differ substantially between them.
When there are many reasonable ways of answering a question or looking at a problem, it can be hard to choose which is best. Often the best answer is not to choose- instead, take all the reasonable answers and average them. Dan Gardner and Philip Tetlock call this approach Dragonfly Eye forecasting, since dragonfly’s eyes see through many lenses. So what does the dragonfly see here?
Lets start with the US House, since everyone covers it.
FiveThirtyEight’s latest forecast shows that Republicans have an 85% chance of taking the House; it shows a range of possible outcomes, but on average predicts that Republicans win the popular vote by 4.3% and take 231 House seats (substantially over the 218 needed for a majority)
The Fair Model predicts that Democrats will win 46.6% of the two-party vote share (leaving Republicans with 53.4%). This has Republicans winning the popular vote by 6.8%, a moderately bigger margin than FiveThirtyEight. The reasoning is interesting; the economy is roughly neutral since “the negative inflation effect almost exactly offsets the positive output effect”, so this is mainly from the typical negative effect of having an incumbent party in the White House.
Prediction markets: PredictIt currently gives Republicans a 90% chance to take the House. Polymarket gives them 87%. Insight Prediction also gives them 87%. Kalshi doesn’t have a standard market on this, but their contest (free to enter, 100k prize) predicts 232 Republican seats.
Its a bit tricky to average all these since they don’t all report on the same outcome in the same way. But the overall picture is clear: Republicans are likely to do well in the House, with an ~87% chance to win a majority, expected to win the popular vote by ~5.55% and take ~232 seats.
The Senate is closer to a coin flip and harder to evaluate.
FiveThirtyEight gives Republicans a 53% chance to win a majority (51+ seats for them; Democrats effectively win if the Senate stays 50-50 since a Democratic Vice President breaks ties for at least 2 more years). The most likely seat counts are 50-50 or 51-49, but confidence intervals are pretty wide and 54-46 either direction isn’t ruled out.
The Fair Model doesn’t make Senate predictions, only House and Presidential predictions.
Prediction markets: PredictIt gives Republicans a 70% chance to win a Senate majority, probably with 52-54 seats. PolyMarket gives Republicans a 65% chance, as does Insight Prediction. Kalshi predicts 53 Republican seats.
Overall we see a much higher variance of predictions in the Senate; a 17pp gap between the highest (70%) and lowest (53%) estimates of Republican chances, vs just a 5pp gap for the House (90% to 85%). This shows up with the seat counts too; everyone agrees there’s a substantial chance Republicans lose the Senate, but if they do win, it will probably be by more than one seat. The average estimate is ~52 Republican seats. FiveThirtyEight and PredictIt agree that the closest Senate races will be Georgia, Pennsylvania, Arizona, Nevada, and New Hampshire (though they rank order them differently), so those are the races to watch.
Forecasts for governors aren’t as comprehensive, but FiveThirtyEight predicts we’ll get about 28 Republican (22 Democratic) governors, while PredictIt expects 31+ Republicans; I’ll split the difference at 30. Everyone agrees that Oregon is surprisingly competitive because of an independent drawing Democratic votes. The biggest difference I see is on New York, where PredictIt gives Republican challenger Lee Zeldin a real chance (26%) but FiveThirtyEight doesn’t (3%).
Overall forecast: moderate red wave, Republicans take the House and most governorships, probably the Senate too. But if they lose anything it is almost certainly the Senate.
These forecasts seem about right to me. Democrats are weighed down by an unpopular (-11) President and the highest inflation in 40 years. This would lead to a huge red wave, but Republicans have their own weaknesses; an unpopular former President lurking in the background, and the Supreme Court making a big unpopular change voters blame them for. This shrinks the red wave, but I don’t think its enough to eliminate it. The effect of Roe repeal is fading with time, and the unpopular Biden is more salient than the unpopular Trump; Biden is the one in office and is more prominent in media coverage. Facebook and recently-acquired Twitter may be doing Republicans a favor by keeping Trump banned through Election day. But if he drags Republicans down anywhere, it will be the Senate, where candidate quality (not just party affiliation) is crucial and his endorsements pushed some weak/weird/extreme candidates through primaries. We’ll also see this “extremist” Trump effect (abetted by cynical Democratic donations to extreme-right candidates) dragging down Republicans in some key governor’s races like Pennsylvania, where Democrats are now 90/10 favorites..
Political betting has long been in a legal grey area. It seems that the Commodities Futures Trading Commission wants to make everything black and white, but at least for now it has simply made everything murkier.
PredictIt is the largest political betting site in the US; if you want to know who is likely to win an upcoming election, its the best place to find a quick answer. Prediction markets have two great virtues- they are usually right about what’s going to happen, and if they aren’t you can bet, making money and improving their accuracy at the same time.
PredictIt has operated since 2014 under a “no-action letter” from the CFTC. Effectively, the regulators told them “we’re not saying what you’re doing is definitely legal, but we know about it and have no plans to shut you down as long as you stick to the limits described in this letter”. But last week the CFTC withdrew their letter and ordered PredictIt to shut down by February 2023.
My first question was, why? Why shut them down now after 8 years when all their operations seem to be working as usual? The CFTC said only that “DMO has determined that Victoria University has not operated its market in compliance with the terms of the letter and as a result has withdrawn it”, but did not specify which of the terms PredictIt violated, leaving us to speculate. Did the scale simply get too big? Did they advertise too heavily? Did Victoria University, the official operator, let too much be handled by a for-profit subcontractor? Did some of their markets stray too far from the “binary option contracts concerning political election outcomes and economic indicators” they were authorized for?
PredictIt hasn’t been much clearer about what happened, simply putting a notice on their site. Their CEO did an interview on the Star Spangled Gamblers podcast where he said there was no one thing that triggered the CFTC but did mention “scope” as a concern- which I interpret to mean that they offered some types of markets the CFTC didn’t like, perhaps markets like “how many times will Donald Trump tweet this month”.
The other big question here is about PredictIt’s competitors. In 2021 it seemed like we were entering a golden age of real-money prediction markets, with crypto-based PolyMarket and economics-focused Kalshi joining PredictIt. I looked forward to seeing this competition play out in the marketplace, but it now seems like we’re headed toward a Kalshi-only monopoly where they win not by offering the product users like best, but by having the best relationship with regulators. Polymarket had offered markets without even a no-action letter, based on the crypto ethos of “better to ask forgiveness than permission”; this January the CFTC hit them with a $1.5 million fine and ordered them to stop serving US customers.
If the CFTC doesn’t reverse their decision to shut down PredictIt, then February 2023 will see a Kalshi monopoly. This has led to speculation that Kalshi is behind the attack on PredictIt; their cofounder issued this not-quite-a-denial. But it certainly looks bad for the CFTC that they are effectively giving a monopoly to the company that hires the most ex-CFTC members.
For now you can still bet on PredictIt or Kalshi (or even Polymarket if you’re outside the US). If you’d like to petition the CFTC about PredictIt you can do so here. It might actually work; while the CFTC’s recent actions certainly look cronyistic, they’ve been reasonable compared to other regulators. They’re giving PredictIt no fines and several months to wind down, and even Polymarket gets to keep serving non-US customers from US soil. I’d likely make different decisions if I were at CFTC but the ideal solution here is a change in the law itself, as we’ve seen recently in sports betting. Prediction markets are impressive generators and aggregators of information, and politics and policy are at least as valuable an application as sports. To go meta, suppose we want to know- will PredictIt survive past February? There’s a prediction market for that, and its currently saying they’ve got a 20% chance.
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