How to Profit Off Politics

*This article is intended to be informational only and should not be considered financial advice.  

Have you heard of a website called PredictIt.org (“PredictIt”)?

PredictIt is a legal way to bet on political questions in the United States. These questions range from who the next President will be to whether a Supreme Court Nominee will be confirmed. I first heard of this service in 2015 and thought it was crazy! How can these types of bets be allowed when online sports betting (at the time) was illegal in most US states?

According to its website, “PredictIt is run by Victoria University of Wellington, New Zealand, a not-for-profit university, for educational purposes. The site is supported by Aristotle International, Inc., a U.S. provider of data processing and verification services. We operate under the terms of a No Action letter granted by the Commodity Futures Trading Commission (CFTC) in October, 2014.”

Users are limited to only $850 per political question. This isn’t a ton money relative to the stock market, where you can invest virtually unlimited amounts of funds, but it’s sufficient to generate a lot of interest. I’ve used PredictIt off and on throughout the years, mostly in 2015 and 2018. During these years I stopped using Predictit because I monitored my positions too often and it made me more anxious. Rather than just enjoying the service as a fun way to gamble! I recently got back into PredictIt as my emotional temperament has become more compatible with what the website has to offer.

To me, the ability to bet on political questions is FUN! I’m a gambler at heart. I like to throw down $25/hand on blackjack, play poker, and take the occasional trip to Vegas. PredictIt allows me to combine my professional knowledge from working as a lobbyist with my desire to gamble. Some questions on PredictIt are very narrow and the price for the questions fluctuate greatly, like after a new poll shows a big shift in an upcoming election. For these types of question, users really have to be constantly looking for new polls and data and trading their shares accordingly.  

But many other questions, especially those dealing with the presidential election, are based more on the “feel” of the situation. For example, two bets I recently made were focused on whether a Democrat would win the popular vote in the presidential election, or another was whether Joe Biden would win Minnesota. I personally believe that President Trump’s 2016 margins were a high watermark for him, so in my view, there is no way that he could win the popular vote in 2020 when he did not previously. My rational is that Trump’s approval ratings have declined since 2016, he now has a political record, and he is facing a more likable candidate in 2020. When you combine these factors, plus look at the current polling data, it seems incredibly unlikely that Trump wins the popular vote. He could win the presidency due to the electoral college, but that is an entirely different question. Trump has 19% odds of winning the popular vote currently on PredictIt. This seems wildly off to me… so I’m betting against this question in hopes of winning a small profit come November.

Another question that that seemed divergent from reality and history is whether Trump will win Minnesota. At one point Trump had a 37% chance of winning Minnesota according to PredictIt investors. Traditionally the odds of Minnesota going to Republicans on Predictit are closer to 10-20%, so I bought the maximum number of shares.  Minnesota hasn’t voted for a Republican in a presidential election since Nixon in 1972. Minnesota even voted for their home state senator Walter Mondale over Ronald Regan in 1984. I’m not saying Trump can’t win Minnesota, but it seems incredibly unlikely, and the odds seem out of sync with reality. Since buying these shares this question has come closer to traditional odds, and I am up $100 profit so far, with two weeks to go until the election.

Can Predictit Become a Consistent Source of Income

The key question is whether PredictIt is more like poker – which is a skill game – or is it more like gambling, where the House always wins.  I believe PredictIt is more analogous to Poker than it is to gambling. The similarities to Poker are as follows:

  • Knowledge and skill are rewarded
  • Easy money exist  
  • PredictIt profits via a “rake”

Knowledge and Skill are Rewarded

Insider trading is not illegal on an unregulated site like PredictIt. So “Washington Insiders” can use their knowledge for a profit, perhaps in a questionably ethical way, depending on the question.

But most users aren’t Washington Insiders, so the question is whether the average user can use research tools available to the public to bet on questions for a consistent profit over time. In my experience, the answer to this is yes, because many users bet based on what they want to see happen, rather than the statistical odds. Right now on PredictIt, Republicans have a 14% chance of taking over the House of Representatives. This is at odds with current polling, momentum, and all the political forecaster predictions. In a presidential election, it only takes a few states to make all the difference. In contrast, the House is made up of 435 districts, that are each unique and more than 100 individual districts are competitive each cycle. With that large of diversity, huge swings are less likely. Political forecasters give Republicans a 5% chance to win the House. If true, that means that there is currently a 9% misalignment of risk, and thus potential profit, to be had for those who are paying attention.

Easy Money Exists

There are questions on PredictIt that are easy slam dunks. For example, there is a question about whether a Democrat win California’s vote for President. It would take a massive cataclysmic event to have Trump receive a majority of CA votes. Yet the odds of a Democrat winning are not 100%. They are more like 94%. In this scenario users who bet on a Democrat winning California will likely make around 6% profit for an almost a sure bet. I think there is likely a .05-2% chance that Trump wins California, so after a risk adjustment your profits are more like 4-5%.

While a few percentage points don’t seem like a lot, this strategy is generally repeatable, so if you do this several times throughout the year, you quickly reach double digit annual returns. While this approach is boring, does seem effective.

PredictIt Profits via a Rake

While playing poker at a casino, the house profits be taking a small portion of the pot each hand. The amount taken each hand is called the “Rake”, and it’s typically a few percentage points of each pot, up to a maximum limit.

Predictit makes money by doing a similar rake model. For every dollar you make in profit on a PredictIt question, PredictIt takes a 10% fee. This doesn’t apply to losses or initial investment. Additionally, there is a 5% charge when users withdraw money from PredictIt, encouraging users to keep their money in the system.

These fees are reasonable in my view – but most importantly – the PredictIt model isn’t designed to make users lose money overtime. The rake pulls money out of the system overall – but if you are a skilled user – there is not anything stopping you from dominating the competition. Just like in poker.

Summary

PredictIt is a fun way for users to gamble on political questions. For those who love politics and want to use their knowledge, it could also be a potential source of income. But like everything else, the PredictIt experience is at its best when used in moderation and only with money that users can afford to lose. 

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