Prediction markets get Democratic win right, with a few surprises

WASHINGTON, Nov 4 (Reuters) - Prediction markets got the big picture right in the US midterm elections, although a few races delivered surprises as Democrats seized control of the Senate and House of Representatives.

With more than $1.48 billion wagered on Tuesday's elections, the results offered a test of whether prediction markets could translate their odds into accurate electoral forecasts.

Bets placed on a Democratic midterm sweep largely paid off despite some mispriced races, as tens of millions of voters delivered a stinging rebuke to US President Donald Trump.

"Prediction markets priced the midterm outcome within hours," said Kelly Ye, head of research at digital asset trading platform Talos.

Several closely contested Senate races had attracted millions of dollars in bets, putting prediction markets under scrutiny. In many cases, the results tracked expectations, with Democrats winning Senate seats in Texas and Ohio.

"This was the first true prediction markets election," said Harry Crane, professor of statistics at Rutgers University.

"The markets projected Democratic wins across the board throughout the closing weeks of the campaign, and were quick to react in real time to voting information as it rolled in," he added.

Prediction markets rose to prominence as they diverged from traditional opinion polls by signaling a Trump victory in 2024, and analysts were scrutinizing their performance this week.

While the markets cite high accuracy rates in their betting odds, some high-profile misses during the US primaries and in Brazil's presidential election have shown they are fallible.

Prediction markets allow users to buy and sell contracts tied to real-world events, with prices reflecting traders' collective expectations. Critics, however, say those odds can be skewed by speculation, thin liquidity and concentrated bets.

Kalshi's total trading volume on election markets reached over $2.5 billion this cycle, compared with $1.3 billion during the 2024 election cycle, which included the presidential race.

Traders on Kalshi were assigning a 55% probability to a "blue tsunami" as early as April. Meanwhile, Polymarket's election forecasts were about 98% accurate, a person familiar with the matter told Reuters.

One notable miss came in conservative South Carolina, where Democrat Annie Andrews defeated Republican Darline Graham to win a Senate seat, defying market expectations.

‌Kalshi and Polymarket had implied a 70% chance of Graham, the sister of the late US Senator Lindsey Graham, winning that race as of late afternoon Tuesday.

"Prediction markets can be useful because they aggregate the views of people who have an incentive to be right, not just to express an opinion," said Brian Jacobsen, chief economic strategist at Annex Wealth Management.

"They can give a good indication of where the weight of information is pointing, but a prediction isn't a promise. Whether it’s politics or sports, you still have to hold the election or play the game to know the result," he added.

(Reporting by Douglas Gillison and Michelle Price in Washington and Manya Saini in Bengaluru; Editing by Deepa Babington, Lincoln Feast and Alexander Smith)