How Election Markets Work, Mechanically
The structure of political event contracts: what resolves them, why venues disagree, and how to read a political price without reading politics into it.
Political markets attract the most attention and cause the most confusion. This page is about their mechanics. It takes no view on any political question, and neither does this site.
What resolves them
The most important thing about a political contract is the certifying source and the deadline, not the subject.
Official certification. A named authority declaring a result. Slow, and definitive.
Call by named organisations. Faster, and dependent on whose call counts.
Assumption of office. A different question from winning, and occasionally a different answer.
Two contracts on the same election using different resolution sources can resolve at different times and, rarely, differently. That is a genuine product difference, not a mispricing. Resolution differences.
The long gap between obvious and official
The period between everyone knowing the result and the result being official can be days or weeks. Throughout it, a contract requiring official certification will trade near, but not at, the extreme.
That residual is not a forecast of an upset. It is the combined cost of capital, the spread, and a small allowance for process risk. Reading it as "the market thinks there is a 3% chance of a reversal" overstates it. Prices near 1c and 99c.
Why political markets are structurally hard
Definitional edge cases. Withdrawals, replacements, deaths, disqualifications, contested counts. Each needs a rule and the rules differ between venues.
Multi-outcome structure. Candidate fields are sets, and the members are not independent. The prices should sum to about one, and the long tail of low-priced candidates is systematically overpriced. Multi-outcome markets and the favourite-longshot bias.
Partisan participation. Some participants trade their preferences rather than their expectations. In a liquid market this is absorbed; in a thin one it moves the price. This cuts in both directions and is not a claim about any group.
Attention concentration. Headline races have real liquidity. Everything below them is thin, and their prices should be weighted accordingly. Thin market warning signs.
Reading political prices well
Compare against base rates. Incumbency, historical margins, how often polling errors of a given size occur. Base rates first.
Weight by liquidity. A headline market with real volume deserves substantial deference. A thin one on an obscure race deserves very little.
Watch changes, not levels. The level absorbs a lot of noise. A sustained move over days on real volume is more informative than the number itself. Top movers.
Do not treat a market as a poll. It is an aggregate of expectations with money attached, which is a different instrument with different biases. Prediction markets versus polls.
The cross-venue picture
Political markets are where venue coverage overlaps most, so they are where cross-market comparison is most possible. They are also where the resolution criteria diverge most, because the edge cases are numerous and each venue words them differently.
That combination — high overlap, high divergence risk — is exactly why comparability has to be graded rather than assumed here. Equivalence grades and cross-market gaps.
Next
Interest rate markets, where the prices are considerably better behaved.
Educational content only. Nothing here is financial advice, a solicitation, or an offer to trade. Prediction markets can move against you and a position can lose its entire value. Where this guide describes a difference between venues it describes a theoretical cross-market edge in observed prices, which is not a profit: fees, spreads, capital lockup, transfer time and differing settlement rules all come out of it first.
Keep reading
What Markets Price · 3 min readWhy Long-Horizon Markets Behave StrangelyA contract settling in two years is priced by people who must tie up capital for two years. That single fact explains most of what looks odd about them.
What Markets Price · 3 min readInterest Rate Markets and Why They Are Well PricedRate decision contracts compete with an enormous existing futures market. That competition makes them among the most reliable prices on any event venue.
What Markets Price · 3 min readHow Markets Behave Around a Scheduled Data ReleaseA known number arrives at a known second. What happens to spreads, depth and prices before, during and after, and why the window is not for everyone.
Prediction Market Basics · 4 min readA Short History of Prediction MarketsFrom nineteenth-century election betting on Wall Street to regulated event exchanges and on-chain venues, with the research that made the idea respectable.