Suppose I were to lay $1000 on Biden right now. According to Betfair it seems that, if I win, I make a profit of $840.
And our model gives Biden an 88% chance of winning. But we’re modeling Biden vs. Trump, whereas Betfair considers other possibilities, including replacements for the Democratic or Republican nominee. So let’s take our 88% down to 80% to account for those unmodeled outcomes.
My expected return from this $1000 bet is then 0.80 * $840 + 0.20 * (-$1000) = $472.
That’s pretty good—a 47% rate of return! That’s a pretty juicy investment.
I discussed this with Josh Miller and he pointed out that if you wanted to hedge this bet, you could just wait until Biden’s price goes up enough and then cover the bet in the opposite direction.
OK, how are things going today? Our forecast is now giving Biden an 87% probability—again, let’s round down to 80% to allow for possibilities not in our model.
And here’s Betfair:
So now $1000 on Biden will give you $670 if you win, and my expected return from that $1000 bet is 0.80 * $670 + 0.20 * (-$1000) = $336.
Only a 34% rate of return. But still pretty good!
Alternatively, had I bet last week and I wanted to cash out now, I could bet against Biden at the current odds and have a sure thing. But I wouldn’t do that, because I think that Biden is still way undervalued by the market.
As we’ve discussed, I think the implicit model of the bettors is relying too heavily on the experience of 2016. I guess things are changing now because of forecasts such as ours.
I’m not recommending you make this bet, or that you make any bet.