You’re assuming a candidate wants to win. But what would happen if a successful candidate decides he wanted to cash in rather than win his election? For a candidate to lose his election is very easy – the odd racist or pro-pedophile comment “accidentally” slipped into a speech.

That’s a very good point. Consider the history of sports betting. Now imagine if it were okay for a professional sports player to bet against himself. It’s easy to throw a game, or just not score enough points to beat the spread.

Second, markets are subject to their own irrationalities; just consider the various stock market bubbles that sometimes occur. For that matter, why was there EVER a market for Beanie Babies as high-priced collectibles? When the “greater fool theory” becomes the primary justification for buying something, and there really are plenty of greater fools around, then individually rational behavior can become collectively ridiculous.

If the betting markets allow bets on percentage of the vote, not only on result, then even losing candidates may be more tempted to destroy their campaign for cash.

This could hugely undermine the effectiveness of betting markets, even with disclosure and insider trading sorted. A candidate bet against himself may be a hedge, a preparation for the self-imollation of his campaign, an attempt at publicity, or maybe a superstitious gesture. Each carries very different meanings, and interpreting them depends on knowing the inner mentality of the candidate, something that is practically impossible. This would dilute the reliability of the betting market, especially if the bet is large.

I’m not sure, though, if an expected value of the derivative would satisfy the politician. After all, he would want to conclude his campaign, win or lose, with the same amount of money (or utility). If he’s not going to execute similar campaigns (or take similar risks, with similar odds) a large number of times throughout his life, expected values don’t remove the risk at all. To drive this point home, suppose someone offered you a one-time bet on a coin toss for $1 million – would you take it? Probably not, even though your expected outcome is $0. If the person promised to offer the bet to you 1,000 times, you’d be indifferent, but a one time bet is just too risky.

Also, I’m not sure politicians could hedge very easily. A politician could place his bet mere minutes before the election so that he is certain of the odds (and, hence, how much to bet), but then he wouldn’t have access to this money to spend on the campaign.

Alternatively, the candidate could bet several months before the close of the market, but the odds could change a lot. He can assign his own personal probability to winning, but it’s unlikely to be as accurate as the market (that’s the whole idea of betting markets, right? The many are smarter than the few?).

Ian

Actually, current odds don’t matter at all if the outcome is a binary one like be president or not. Using the underlying of a simple derivative (with a binary outcome, which we obviously have here) and a riskless asset you can always hedge away all risk trivially.

A numerical example has already been given in the original post, so I refrain from constructing one here.

See Cox-Ross-Rubinstein’s binomial tree for option pricing, but the principle can be used in a wider context. (I won’t go into the convoluted thing that is the riskless probability here).

How is this any different from Lieberman running for the Senate in 2000? He was hedging his bets inefficiently; why not let him be open (and cheap) about it next time?

Presumably, a candidate who would bet against himself would do so according to his perceived odds of losing. Otherwise, how would he come out with even money, win or lose? He can’t count on the current odds, since they could change; he’s got to put his money where his mouth is like everyone else in the betting market and use his own information to formulate a bet. The premise of this post of borrowing $10 and using half to bet and half on the campaign is simplistic – the amount to allocate to each should be proportional to the odds of winning, not the nominal amount at stake.

And, if other betters think that the candidate’s bet was inaccurately, there’s a golden opportunity for them – betting the other way just got cheaper!

A few people mentioned that politicians might try to manipulate the markets, but Slate has an article that describes how someone may have attempted this during the Bush/Kerry 2004 election http://www.slate.com/id/2169647/). Just like betting markets are supposed to work, the market seized on the opportunity:

“But it’s hard to manipulate markets for long. In the 2004 case, Bush’s re-election probability climbed back to 54 percent within minutes as profit-seeking traders spotted the free money. “When I heard about it, I started checking the betting markets in the early hours a lot more closely,” says Justin Wolfers.”

Whatever we need, more power to the hereditary rich is not it.