If we needed another distinction between polling and crowd wisdom, The Economist provided a simple yet crystal clear one today. According to The Economist, while Donald Trump is leading in the Polls, Jeb Bush is, by far, the favorite to win the GOP nomination. How is that possible? Let's examine carefully.
As you can see, there is a fundamental difference between voting intentions and picking the likely winner. Voting intention represents who you intend to vote for and has nothing to do with predicting a winner. Likely winner is short for your prediction. What we see here is clear: GOP potential voters favor Donald Trump, but they believe Jeb Bush will win the nomination.
Predicting a political winner is a fascinating crowd wisdom test and it's very insightful to look to the predictive and betting markets for indicators. History shows a big difference between voting intentions and predicting winners. As a matter of fact, predicting winners is by far more accurate then trying to predict based on voting intentions.
In Israel, 2 weeks before the elections, while opinion polls where all favoring the Labor Party, 81% of gamblers were betting on Netanyahu to come through as the victor. In Scotland, while most opinion polls were split down the middle, political betting lines have unanimously experienced much higher "NO" volumes. In Greece, however, things went the other way, as Paddy Power had to cough up a substantial amount of money, a result of being left “red-faced” after paying out early to gamblers who incorrectly bet that Greek voters would back an austerity referendum.
This time, however, the prediction markets are unanimously confident.
Predictit has Jeb Bush as a clear crowd favorite:
PredictWise is offering the same crowd prediction and further supports the assumption the real race is for second place and better odds at the VP ticket:
So when do prediction markets fail and when are the likely to come out right?
Barry Ritholtz has written an insightful, must read and very critical piece on the false wisdom associated with the crowd in some situations. He attributes possible failures of prediction markets to a number of factors.
Real Markets are diverse and trade in huge volumes. Prediction markets are not. This is key to understanding crowd failures, simply because the crowd is best when it creates a thinking market where such doesn't exist.
Prediction Markets can fail where the stakeholders are not close enough to the actual decision makers and do not have "skin in the game", a key ingredient of true crowd wisdom.
Polling data interferes with the prediction market. This is crucial as crowd wisdom requires independent individual thinking and unbiased "vote casting".
How would we classify the current situation? Well, the elections are still far away, the primaries haven't kicked off, so polling is unlikely to interfere so much with predictions. There is no real market that takes away the prediction attention and every American Citizen who participates in the predictive market is a natural stakeholder. While it's too early to call it, the conditions for crowd predictions are pretty good and we can safely say Jeb Bush has been favored by the crowd to collect the GOP nomination.