Predictive Markets: How Money Can Influence Election Outcomes

Beyond traditional polls, a growing number of Israelis are engaging with predictive markets to forecast political results. Platforms like Polymarket have seen tens of millions of dollars traded on the identity of the next Israeli prime minister, displaying seemingly precise probability percentages. However, these figures warrant closer examination regarding their formation, the capital behind them, and their potential influence on voters.

Unlike professional election polls that rely on statistical methodologies and voter surveys, predictive markets generate numbers through the buying and selling of contracts on specific outcomes. The resulting price is translated into a probability percentage, reflecting the choices of traders, who may not be Israeli or representative of the general electorate. The volume of trade can vary dramatically, from nearly $38 million on the next prime minister to as little as $500 on the vote share for a specific party, yet both display precise-looking percentages.

Market liquidity, determined by the number of buy and sell orders, dictates how easily a single transaction can shift prices. Thin markets, where small trades can significantly alter a candidate's perceived chances, are particularly susceptible. Recent order logs for Israeli election contracts have shown very small sums, raising questions about the ease of price manipulation. This also presents a regulatory challenge, as political donations in Israel are limited and supervised, while predictive markets, though prohibited domestically, influence public discourse. Foreign traders can invest substantial sums via cryptocurrency, potentially influencing outcomes without transparent contributions or campaign advertising.

The numbers from these markets are frequently cited in media and social networks, with candidates being declared "leaders in predictive markets." Research on poll influence suggests that perceptions of who is leading can affect voter behavior, potentially reinforcing support for frontrunners, influencing strategic voting, and impacting turnout. This creates a risk where money injected into a thin market can move prices, which then become headlines, generating momentum. Thus, a mechanism intended for prediction might inadvertently shape the outcome it aims to forecast.

While predictive markets can offer valuable information, the media's serious consideration of them necessitates transparency. Alongside probability percentages, reporting should include trade volume, market depth, trade concentration, and participant eligibility. The crucial question is not just the probability presented, but how that number was generated, as a thin market may shape voter perceptions rather than merely reflect them.