(Bloomberg) -- Three years ago, Paddy Power made a spectacular mistake.
A month before the U.S. presidential election, the Irish bookmaker paid out $1 million to gamblers who had bet on Hillary Clinton, believing her victory over Donald Trump to be a certainty.
Trump’s win cost Paddy Power more than $5 million, the biggest payout on a political event in the firm’s history.
While bookies routinely pay out early to draw publicity, the blunder is a reminder that they can, and do, get it wrong. After predicting that Britain would vote to stay in the European Union and Theresa May would win a big majority, the industry now expects Boris Johnson to win Dec. 12’s election. Yet even the gambling firms themselves are preaching caution. While polls look good for Johnson, this week sees two televised appearances alongside Labour Party leader Jeremy Corbyn, which could yet alter the dynamic.
“We are not pretending to offer an infallible guide to the outcome of political events,” according to Alan Alger, head of PR at Betway. “What we are doing is laying out probabilities.”
While traders and analysts routinely ignore the betting on ferret bingo or what Johnson will name his new dog, they rely on the market as a guide to calling inherently unpredictable political events.
Swedish bank SEB AB is one of many that include bookies’ odds in their notes to clients on politics. At about 0.5% of the market, politics accounts for a tiny part of the odds-makers’ revenue -- but it’s a boon for publicity.
Next month’s election is set to determine the fate of Brexit and the future direction of the U.K. economy for a generation. After May’s poll lead evaporated during the 2017 campaign, Conservatives are nervous that Johnson’s 12 point average lead could also melt away. Clouding the picture further is the unpopularity of Corbyn and the potential resurgence of the Liberal Democrats. Amid that uncertainty, traders are seizing on anything that could bring some clarity.
The betting markets correctly predicted all but one U.S. presidential election from 1868 to 2015, according to Professor Leighton Vaughan Williams, director of the Betting Research Unit and Political Forecasting Unit at Nottingham Trent University. In 2005, he called the number of seats for the Labour Party in the U.K. election entirely by studying the betting, he said.
Part of the problem, he said, stems from the odds being misinterpreted.
“If an event is 4/1 on, that implies an 80% likelihood that it will happen, which people seem to take as ‘the event will definitely happen’,” he said. “Turn that around though, and those odds imply a 20% chance that it will not happen, which is not insignificant.”
At 2/5 on for a Conservative majority, punters would need to bet 5 pounds ($6.48) to win two pounds -- effectively meaning Paddy Power gives Johnson a 71% chance of avoiding another hung parliament. Labour’s best shot is a minority administration at 5/1, a 17% chance.
Next month’s election is still deeply unpredictable. It has proved a “muddle” for traders to price correctly, said Betway’s Alger. Opinion polls may be even less reliable than usual, he added. That’s because they may struggle to capture the “shy-Labour” phenomenon -- voters who are reluctant to tell pollsters they are backing the party.
“The dynamic has changed a lot when it comes to U.K. general elections,” said Sarbjit Bakhshi, head of political betting at Smarkets Ltd., a betting exchange. “Given the rise of multiple parties, including the Liberal Democrats and Brexit Party, historical models based on the two party system are not much use.”
For all that, betting markets can offer clues to the careful observer, Vaughan Williams said.“A few days ago, the odds of a Conservative majority began to shorten quite significantly despite no obvious news, then we hear the Brexit party won’t stand in 317 seats,” he said. “Often the markets can give us guidance ahead of polling.”
(Adds chart, updates odds)
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