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Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.

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Speaker 1: I'm Joe Wisn'tthal, Managing editor at Bloomberg Markets, and I'm

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Speaker 1: Tracy Alloway, Executive editor at Bloomberg Markets. Uh so, Tracy.

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Speaker 1: Today's UM episode is going to be I think our

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Speaker 1: first repeat guests since we've had the since we've started

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Speaker 1: the podcast, our first follow up, right, yeah, first follow up.

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Speaker 1: So longtime listeners will remember several weeks ago we had

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Speaker 1: an episode all about the betting markets in the UK,

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Speaker 1: political betting markets and what people were gambling ahead of

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Speaker 1: the bregsit vote. And as you might have heard, most

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Speaker 1: people got that vote just a little bit wrong. Yeah,

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Speaker 1: but not just. I mean the betting shops didn't just

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Speaker 1: get Brexit wrong. They kind of got it wrong in

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Speaker 1: the face of a lot of then that was suggesting

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Speaker 1: that it was going to be a lot closer. Right,

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Speaker 1: Some of the polls showed pretty much a fifty fifty

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Speaker 1: split right ahead of the vote, and the betting shots

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Speaker 1: still had the chances of remain much much higher. Yeah. No,

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Speaker 1: that was one of the remarkable things, which is that

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Speaker 1: the polls never showed remain with a commanding lead at

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Speaker 1: least not in the last several weeks. And yet both

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Speaker 1: the gambling markets and just sort of the pure currency markets,

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Speaker 1: as judged by the violent reaction we saw in Sterling

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Speaker 1: in the wake of the vote, everyone was caught completely offside.

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Speaker 1: And so you like to think, or one might think

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Speaker 1: that gamblers or financial markets somehow distill the wisdom of crowds,

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Speaker 1: and that the wisdom of crowds is usually right. But

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Speaker 1: as we can see in this case, at least, the

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Speaker 1: wisdom of crowds was incredibly wrong. It was costly for

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Speaker 1: exactly why they got it so wrong this time, right, great,

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Speaker 1: So with us now to talk about political betting markets

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Speaker 1: and what they got wrong, is Mike Smithson, the editor

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Speaker 1: of Political betting dot Com. Mike, we had you on

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Speaker 1: the podcast back in early May and we talked about

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Speaker 1: what um the betting markets were saying for the Brexit vote,

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Speaker 1: and suffice to say, the betting markets got it quite wrong.

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Speaker 1: What happened. I think everybody got it quite wrong. I

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Speaker 1: think that the we saw that the polls that were

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Speaker 1: coming out on even light on the final day, we're

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Speaker 1: showing that Remain had a lead, and I think the

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Speaker 1: betting markets were following those polls and at it. As

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Speaker 1: it turned out, we're wrong and and people lost a

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Speaker 1: lot of money who were actually gambling on that election,

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Speaker 1: adding adding to the other to prevail us of the

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Speaker 1: actual outcome. But that's a different matter. So I'm confused though,

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Speaker 1: because the betting markets are supposed to do something other

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Speaker 1: than just reflect on the poles, right, They're supposed to

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Speaker 1: add in their own calculations of probabilities and things like that.

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Speaker 1: So what exactly went on here? Um, Well, whatever those

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Speaker 1: calculations were, those didn't actually apply, I think. I think

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Speaker 1: that though, I should say that I didn't place any

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Speaker 1: bets on the on the referendum from about three weeks

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Speaker 1: beforehand because I was getting a sense that things were

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Speaker 1: a lot tighter than the poles were suggesting. But other poles,

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Speaker 1: other poles were not doing that. Now what what other

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Speaker 1: punters are not doing that? Now? What tends to happen

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Speaker 1: with betting on betting markets as you get very close

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Speaker 1: to election day, the the the the actual market, the

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Speaker 1: people actually betting boards out, So you're getting much many,

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Speaker 1: many more people people who were better. Also, as they're

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Speaker 1: bet on football, they're better. They bet another sporting events.

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Speaker 1: They tend to come into the into the betting market,

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Speaker 1: and that they had quite well recorded that this can

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Speaker 1: have a distorting impact on the on the market, and

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Speaker 1: they tend to look at it and they tend to

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Speaker 1: follow the favorites. And my reading is that that's what

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Speaker 1: happened here. I mean, it was actually quite ridiculous on

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Speaker 1: on on the on the night as the results were

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Speaker 1: coming in, it was blinding the obvious from the first

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Speaker 1: the first first areas to declare that this was going

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Speaker 1: to going to go to leave and that's that was

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Speaker 1: certainly what you know, certainly my view of it, and

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Speaker 1: I was tweeting that. But the market was was sort

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Speaker 1: of an half an hour forty five minutes delay in

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Speaker 1: terms of catching up with that reality which was which

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Speaker 1: just appeared very strange to me. And I think it

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Speaker 1: is simply that there were a very different sort of

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Speaker 1: a gamble on the market, not that people would the

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Speaker 1: political specialty. I've noticed the same thing that night, and

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Speaker 1: I was tweeting about it. Um that you know, for example,

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Speaker 1: right as soon as we got the results out of

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Speaker 1: Sunderland and Newcastle too early on and both of them

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Speaker 1: were much worse for the remain camp than by a

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Speaker 1: long large margin than anyone thought. It looked pretty clear,

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Speaker 1: and the political experts I was following said, you know,

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Speaker 1: this really looked bad for Romaine. But it took the markets,

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Speaker 1: and not just betting markets, but even Sterling, you know,

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Speaker 1: still held up for a while. It really seemed like

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Speaker 1: people were so entrenched in this view that Remaine was

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Speaker 1: going to win that counter evidence right in their face.

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Speaker 1: It took the people just weren't accepting it. I think

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Speaker 1: that was right. I think we we had a pole,

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Speaker 1: two poles who were published immediately after the election, which

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Speaker 1: had been taken during the day, and both of those

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Speaker 1: were showing a lite for Remain, and I think it

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Speaker 1: was the cumulative effect of that. And on the TV

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Speaker 1: screens here those poles were sort of superimposed all the

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Speaker 1: time so people could see it, and I think people

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Speaker 1: were were attaching far too much credence to them. I mean,

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Speaker 1: as I say, I I found after the first two results,

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Speaker 1: it was very clear to me that this was going

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Speaker 1: to be Leave And I have to say I had

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Speaker 1: a very financially very successful night. So you took advantage.

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Speaker 1: You took advantage of the fact that you could see

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Speaker 1: the numbers right in front of your face and the

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Speaker 1: fact that the markets had not reflected them. Yeah. Absolutely,

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Speaker 1: And in fact I was tweeting. I was tweeting on

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Speaker 1: that after a place my bet to say, look fantastic value,

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Speaker 1: get on, get on leave while it is only a

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Speaker 1: thirty nine percent chance and so on, and so it

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Speaker 1: seemed completely It seemed completely right, and that normally have

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Speaker 1: to say without being sounding two hours when I tweet

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Speaker 1: things about political betting, it tends to impact on the market.

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Speaker 1: That didn't even impact on the market, which which suggests

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Speaker 1: that there was a much broader number of people who

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Speaker 1: were betting on it then those who were followed the

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Speaker 1: political blogs and so on. Well, Joe mentioned this idea that, um,

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Speaker 1: the Remain the success of the Remain campaign was kind

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Speaker 1: of entrenched in people's minds, right, No one thought Brexit

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Speaker 1: was going to happen. And one of the criticisms of

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Speaker 1: the bookies ahead or after the vote, I should say,

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Speaker 1: was that we had a large number of bets coming

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Speaker 1: from London, specifically where there was strong report for Remain,

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Speaker 1: and then that ended up skewing the outcome. Is that

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Speaker 1: something you think actually happened. I think that that was

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Speaker 1: there to a certain extent, and I think certainly that

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Speaker 1: the atmosphere in London was was totally different from the

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Speaker 1: best of the best of the country as we as

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Speaker 1: we sort of follow the results, London was very strongly

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Speaker 1: full Remain and obviously London has more active people. I guess,

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Speaker 1: so who are gambling on these methods, and I think

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Speaker 1: that that might have well have distorted the betting betting beforehand,

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Speaker 1: that they that that there people's own observations. I think

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Speaker 1: people that's a big, big factor with gambling, as well

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Speaker 1: as looking at the polls another another another data, your

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Speaker 1: own personal observations, and I think that that in London

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Speaker 1: people got it along. Yeah. I one of the stats

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Speaker 1: prior to the vote that people started paying attention to

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Speaker 1: was that the average bet size for Remain was significantly

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Speaker 1: larger than the average bet size for for Leave, at

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Speaker 1: least according to UM. I think I saw Ladbrokes point

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Speaker 1: out that fact, perhaps others is that useful information? Does

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Speaker 1: that tell you something or should people have taken something

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Speaker 1: from that? That all the people all the money betting

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Speaker 1: on coming from the Remain was probably wealthier people whose

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Speaker 1: circles were more pro Roman. I think that's a very

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Speaker 1: good point. And if we ever have another referendum like this,

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Speaker 1: I think people people will do that. I mean, certainly

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Speaker 1: it was something that I need didn't pick up at

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Speaker 1: the time, and perhaps I I should have done. But

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Speaker 1: the fact that the ethic that did reflect something real

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Speaker 1: as we saw, um, I mean there was there was

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Speaker 1: there was another factor here which which had a big impact.

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Speaker 1: We have early voting in the UK, and something like

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Speaker 1: I think about voters can can't can vote early, and

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Speaker 1: you get all sorts of leaks and information coming out

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Speaker 1: about how the early voting is going, and and and

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Speaker 1: I think that that has impacts had impacts on all

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Speaker 1: sorts of things. But you assume that the bookies, in

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Speaker 1: their wealth of experience with this business, would be making

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Speaker 1: these sorts of adjustments, right, And I get that after

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Speaker 1: the fact we can point out to this thing or

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Speaker 1: that thing, But it just seems really really surprising that

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Speaker 1: they would be taken so off guard by the results

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Speaker 1: of this referendum. I did, and in fact, I think

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Speaker 1: that the the bookmakers have probably lost quite a lot

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Speaker 1: of money on this from from from what I can gather,

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Speaker 1: I think that they made this assumption. They saw the

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Speaker 1: way they saw the way the polls were going, and

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Speaker 1: they were they were betting themselves on the remain victory

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Speaker 1: by not adjusting their odds accordingly, and that that that

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Speaker 1: they probably lost lost quite a lot of money. And

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Speaker 1: that that is we've got two sorts of markets, so

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Speaker 1: those where the book bookmakers set the odds, and that

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Speaker 1: those where the actual market sets the oddware, which done

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Speaker 1: online pairing the bet fair been in particular. But but

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Speaker 1: and I think that Betfair was very much dominated by

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Speaker 1: the London effect and again quite unrealistically, right right through

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Speaker 1: the night, the odds seemed that their odds seemed completely

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Speaker 1: out of out of kilter with with what I was.

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Speaker 1: I was, I was reckoning. And I do think that

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Speaker 1: this difference between the the serious political gamblers, uh and

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Speaker 1: those who are just they sort of come in just

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Speaker 1: to this one event actually had a very very big impact.

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Speaker 1: You know. It seems to me that there were sort

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Speaker 1: of two levels of difficulty assessing which way this was

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Speaker 1: going to go. One was that, you know, there isn't

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Speaker 1: as much experience with referendums as there are with general elections,

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Speaker 1: so you know, no one is quite sure of the

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Speaker 1: turnout model or anything like that. And then the second

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Speaker 1: thing is there seems to be this crisis that's going

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Speaker 1: on in global polling where lots of people, do to

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Speaker 1: the rise of the Internet and due to changing behaviors,

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Speaker 1: are thinking that polls just aren't as quality credible as

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Speaker 1: they used to be do the betting markets and when

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Speaker 1: it comes to politics, are we going to see more

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Speaker 1: and more failures like this as polling is perceived to

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Speaker 1: be less reputable than it has been in the Indeed,

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Speaker 1: I think I think that the British polling industry had

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Speaker 1: a very bad two and fifteen general election and got

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Speaker 1: it completely wrong. And I think they were looking for

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Speaker 1: to the referendum to to sort of geting get things right.

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Speaker 1: And interestingly that a lot of the polsters were doing

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Speaker 1: some fine tuning adjusting their methodology for the for for

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Speaker 1: for their final polls and those adjustments actually on reflection

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Speaker 1: were in the wrong direction, um and and and for

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Speaker 1: that they you know, they they they they they they've

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Speaker 1: lost out. Interestingly, only I think it was only two

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Speaker 1: poles the polsters actually their final polls had had a

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Speaker 1: victory for for for leave. All the other ones were

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Speaker 1: in the remain direction. So does increase uncertainty around polling

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Speaker 1: does that end up making it easier or harder to

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Speaker 1: actually make money in political betting markets? Well, I liked

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Speaker 1: and it probably makes it easier because you're always looking

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Speaker 1: for opportunities where perceptions about what's going on that on

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Speaker 1: the mass are different from what your perception is, um

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Speaker 1: and and as and and so, because the odds are better,

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Speaker 1: you know, if you if you if you've got to

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Speaker 1: if you get to two to one or or five

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Speaker 1: to two, as it was just before after the Sunderland

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Speaker 1: result on Leave, that was that was fantastic overstatement of

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Speaker 1: the chances of a of a Remain victory. So I

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Speaker 1: you know, I think it it actually it kepts. He's

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Speaker 1: quite helpful that the data on which people are making

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Speaker 1: these decisions probably less reliable, so people can be much

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Speaker 1: more sophisticated in their analysis and perhaps make more money.

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Speaker 1: So going forward, I mean, obviously, well we don't really

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Speaker 1: know what's going to happen, but presumably there's not going

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Speaker 1: to be other referendum, but there will be more general

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Speaker 1: elections and more votes and more political betting. Do you

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Speaker 1: think that the result of that, the outcome of this

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Speaker 1: lot of research channelists and certainly a lot of people

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Speaker 1: Bloomberg really watching those polling odds move minute to minute

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Speaker 1: to try to glean some extra insight. Do you think

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Speaker 1: people are going to pay less attention to them now,

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Speaker 1: just after this failure? Well, the problem is you have

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Speaker 1: something like this, So what what? What else? Do you

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Speaker 1: look at? Um? And you know the almost the betting

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Speaker 1: odds of the things that are there that's happening all

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Speaker 1: the time, and there is nothing there is really nothing

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Speaker 1: else on at the at the key at the key moments.

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Speaker 1: But I think that maybe people ought to take things

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Speaker 1: slightly less, slightly less serviucely we had the same thing, incidentally,

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Speaker 1: only at the general election, when of course of the

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Speaker 1: Conservatives won an overall majority. This was a year ago,

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Speaker 1: and even at two or three hours after the exit

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Speaker 1: polls which were pointing to the tour is doing but

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Speaker 1: doing very well, you could get pretty good odds on

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Speaker 1: on a conservative majority, which is what's happened. So that's

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Speaker 1: two major elections on the on the top. Where where

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Speaker 1: the whether the punters have got it, Uh, I've got

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Speaker 1: it wrong. I think there's something pretty profound here. The

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Speaker 1: fact that you know, we like to think that markets

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Speaker 1: reflect all of the available information at any given time,

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Speaker 1: and so that doesn't necessarily mean that markets are perfect forecasters,

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Speaker 1: but that there aren't obvious arbitragees, aren't obvious profit our

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Speaker 1: opportunities at any given time, and that generally the market

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Speaker 1: is the best distiller of information. And what you're saying

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Speaker 1: and what it seems to have happened with this vote,

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Speaker 1: and what seems to have happened in the vote, is

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Speaker 1: that at least in these sort of unusual circumstances, that

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Speaker 1: for the savvy gambler or the savvy trade or the

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Speaker 1: savy uh whatever, the the observer, there are times when

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Speaker 1: if you're paying close attention, they are pretty big discrepancies

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Speaker 1: between what the real data is saying and how the

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Speaker 1: market is interpreting the day. I think that is that

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Speaker 1: is entirely right, and I mean, it's it's finally all

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Speaker 1: the sort of I would regard the professional political gamblers

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Speaker 1: that I know all of them had, almost all of

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Speaker 1: them had very good nights when when when those of

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Speaker 1: aults are coming through, um, But they only represented a

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Speaker 1: very small part of the oborne number of people who

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Speaker 1: are actually looking at those odds, and and and and

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Speaker 1: betting on them, so real quickly, what's the what's the

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Speaker 1: next thing that everyone's betting on these days? Well, they're

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Speaker 1: betting on who's going to be the next prime minister.

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Speaker 1: And we've got obviously David Cameron resigned the morning after

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Speaker 1: that and an election is taking place for who will

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Speaker 1: be the next Conservative leader and big prime minister. And

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Speaker 1: that's that that that looks very interesting. That's very hard

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Speaker 1: to call because there's a complex system that the Conservative

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Speaker 1: Party has of choosing a leader. Basically, the MPs go

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Speaker 1: for a process of voting and then they create a

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Speaker 1: short list of two which then goes to the to

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Speaker 1: the membership and trying to work that one through can

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Speaker 1: can be can be tricky. There's also a long history

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Speaker 1: going back for fifty sixty years of the long long

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Speaker 1: standing favorite for the Conservative leadership not getting it. And

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Speaker 1: so so we're all, you know, you've got we've got

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Speaker 1: to be you've got to got to be careful there.

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Speaker 1: I'm quite worried about that as a betting market. Also,

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Speaker 1: the people are now starting to think, well, what's going

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Speaker 1: to happen to the you know is, are we're actually

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Speaker 1: going to leave the EU? And in fact that We're

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Speaker 1: just going to ask if anyone's betting on that, Yes,

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Speaker 1: there is a in order to leave it, the the

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Speaker 1: government has to invoke Article fifty the EU of Arrangements,

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Speaker 1: and that will require it will require an act of

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Speaker 1: Act of parliament um and for starting to question that

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Speaker 1: there might be This might not be as easy as

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Speaker 1: as as as as as you would think, and a

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Speaker 1: lot depends on who the next Prime Minister is and

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Speaker 1: whether he or she is ready to sort of maybe

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Speaker 1: maybe slightly adjusted or maybe even ignore it. And that

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Speaker 1: that are there any sights yet that are actually taking

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Speaker 1: beds on there yet? Yeah? Yeah, in fact that the

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Speaker 1: market has just just gone up. And interestingly, the market

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Speaker 1: actually is when will Article fifty be invoked? When will

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Speaker 1: the formal process because that's that's when the divorce starts,

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Speaker 1: and you can get three to one on that being

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Speaker 1: after January one, two thousand and eighteen, So that's a

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Speaker 1: given the time that they will take. I actually think

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Speaker 1: that's quite a good bet. What what what site is

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Speaker 1: taking that bet right now? It's sky bet, sky bet cool.

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Speaker 1: Do you think that betting markets will do a better

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Speaker 1: job of pricing or predicting those two situations? The new

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Speaker 1: Prime Minister and the invocation of Article fifty than they

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Speaker 1: did with the I well, first of all, people don't

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Speaker 1: don't bet in order to provide an alternative prediction model.

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Speaker 1: They do it to talk to about money, but hopefully

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Speaker 1: they will. I mean, it's it was. It was quite

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Speaker 1: unusual this time that that that that that it was

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Speaker 1: so long, but we shall see, we shall see, all right.

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Speaker 1: Mike Smithson is fascinating to talk to you. I really

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Speaker 1: appreciate we really appreciate you coming back to share your perspective.

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Speaker 1: I think it was a obviously a fascinating night um

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Speaker 1: on several angles. And thank you for joining us, Thank

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Speaker 1: you for being invited. I really enjoyed that, and I

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Speaker 1: have I was making the same point that Mike was

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Speaker 1: immediately the day after the vote, that it seemed like

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Speaker 1: there was some pretty big discrepancies between the data as

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Speaker 1: it came in and the market. So I guess from

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Speaker 1: my I feel good that I'm not the only one

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Speaker 1: who thought that. Yeah, but it's one of those after

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Speaker 1: the fact things, right like as it's happening, everyone's going like,

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Speaker 1: oh see, I told you so. If you looked at this,

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Speaker 1: you could see that this was going to happen, and

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Speaker 1: I don't know. It just seems to be, you know,

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Speaker 1: getting back to the idea that markets are supposed to

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Speaker 1: synthesize all this information rationally. It just seems like something

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Speaker 1: failed here, right, Like either markets are acting irrationally or

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Speaker 1: the cynic in me wants to say that people are

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Speaker 1: acting irrationally and we're getting weird outcomes in the real world.

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Speaker 1: I don't know. So you think perhaps it was not

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Speaker 1: as much of it done deal after those early votes

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Speaker 1: a people thought, but now after the facts saying oh yeah,

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Speaker 1: it's totally obvious that it was over. I don't know

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Speaker 1: what to think, Joe. It seems like this is just

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Speaker 1: one of those things that makes me really really glad

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Speaker 1: that I'm not actually in markets and having to just

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Speaker 1: write money right exactly? How do you? Probably? I agree?

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Speaker 1: And you know, I also liked his point that even

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Speaker 1: if and I feel like this is probably true, which

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Speaker 1: is that even if the betting markets um don't have

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Speaker 1: much predictive power or don't offer any particular insight, there

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Speaker 1: isn't what else to go on, and so ultimately I

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Speaker 1: don't think people are going to stop looking at them,

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Speaker 1: because it's sort of like you know, if you're walking

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Speaker 1: through the desert and you think, you know, you see

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Speaker 1: something that looks like it might be water, you gotta

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Speaker 1: go to it. Everyone's so thirsty for data. People grasp

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Speaker 1: for whatever is available, right and as you pointed out,

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Speaker 1: it's the same thing with poles. Right now, we know

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Speaker 1: they've been polling problems and this has the comming issue

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Speaker 1: in politics, and now there seemed to be betting market problems.

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Speaker 1: But people will grasp for whatever they can. Yeah, absolutely well,

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Speaker 1: I really, I really enjoyed this episode and that will

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Speaker 1: do it for today's odd lots. Thank you everyone for listening.

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Speaker 1: I'm Joe Wisn't Thought. You can find me on Twitter

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Speaker 1: at the Stalwart and I'm Tracy Alloway. I'm on Twitter

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Speaker 1: at Tracy Alloway. Thanks for listening. Ye