The Upcoming Tide of Bets

By Koleman Strumpf
October 22nd, 2008

Academic economists are usually reluctant to make forecasts. However, one thing is almost certain: the amount of activity in the U.S. presidential market will skyrocket in the days leading up to the election.

The graph above shows the activity at Betfair in the last election: while the markets were open since 2002, well over half of all bets occurred in the last two days (bet volume is calculated here as the amount of money at risk). Suppose this same pattern occurred this year. There has been roughly $9m bet on Obama and $3m bet on McCain at Betfair: this suggests we will see over $10m wagered in the last two days before the election.

What does this mean? Such an in-flood of betting volume also typically accompanies price volatility. There are well known strategies one can utilize to profit from such price changes.

Perhaps more interesting is the question of why so much money comes in at the end. Unlike with a parimutuel system used at the horse track, there is no obvious benefit to delaying a bet. In fact if you have new information or strong beliefs about who will win, you should typically bet now. One explanation could be that bettors are interested in making a quick return. Another possibility is that there is an influx of new bettors attracted by the media frenzy right before the election.

In any event, the late money effect is not isolated to politics. Just wait to see how much money is bet during the Super Bowl in January.

–Koleman Strumpf

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