With Election Day just around the corner, one major subplot is whether prediction markets will be able to actually predict the outcome of one of the most debated and volatile elections in recent memory.
The track record paints a complicated picture. Recent high-profile upsets, most notably the Brazilian presidential election, proved that even an 80% implied probability offers no guaranteed victory. So… what should we expect heading into tomorrow?
Before diving into our analysis, be sure to use our Kalshi promo code and download the Action Network app to get the best insights for your political trading.
WSJ: Prediction Markets Keep Whiffing on Elections
The Wall Street Journal recently published a piece highlighting the meteoric rise of prediction markets in recent years, framing them as an antidote to the shortcomings and methodological blind spots of traditional pollsters. However, recent election cycles have exposed the markets' limitations when forecasting political outcoms.
Across elections in Brazil, Serbia, and Wisconsin, prediction markets priced heavy favorites with implied odds approaching 80%, only for the results to culminate in massive upsets that caught traders off guard.
Brazil: A Market Near 80% for Bolsonaro, and Lula Won
When examining the limitations of prediction markets in political forecasting, the Brazilian election stands out as a textbook case.
For weeks, Flávio Bolsonaro traded as the clear frontrunner, reaching truly surprising implied odds of nearly 80%. All the more striking given that he was challenging an incumbent president pursuing a historic fourth term.
The actual contest proved to be razor-thin, with initial results shocking even Luiz Inácio Lula da Silva himself, who then faced an uphill battle to achieve what initially looked like an impossible upset.
The final stretch leading up to the ballotage featured several pivotal turning points that ultimately broke Lula’s way, as he mounted a far more aggressive campaign and delivered a decisive rhetorical performance in the presidential debate.
Bolsonaro’s odds ultimately crashed down. Lula secured his fourth term despite weeks during which market traders remained convinced that the Brazilian electorate was about to take a completely different path.
According to Kalshi's post-election review, market odds placed Flávio Bolsonaro near 80% as polls closed on Oct. 25. Kalshi analysts have a theory: because first-round polls had underestimated Bolsonaro three weeks prior, traders overcompensated, pushing market odds even higher than the polling consensus.
If you want to read more about politics and elections, visit Prediction Proand read our midterms predictions.
Why an 80% Price is Wrong One in Five Times
Recent studies make it clear that high odds do not guarantee outcomes. In fact, one in every five contracts trading at an 80% implied probability ends up resolving contrary to market expectations.
When it comes to politics, distinct catalysts come into play: a candidate’s momentum, the behavior of traders reacting to fresh polling data, and the inherent volatility of event-driven markets tied to a fast-moving news cycle. The polls vs. prediction market debate rages on.
What Does This Mean for Senate Odds?
Focusing on the midterms, Senate races are notoriously difficult to predict. Right now, only a day away from election day, most tight races remain within the margin of error. On prediction markets, this statistical dead heat translates into contracts fluctuating sharply on a daily basis.
Because Senate races hinge on state-specific dynamics ranging from idiosyncratic candidate appeal to ticket-splitting in fast-growing suburban areas, traders often price higher uncertainty into these boards than into national generic congressional ballots.
While implied odds can spotlight sudden shifts in market sentiment, they do not eliminate the reality that several pivotal seats like Kansas and Texas sit on a knife's edge heading into Election Day.
Polls and Markets Could Miss in The Same Direction
This marks the first midterm election where prediction markets have fully entered the mainstream, influencing not only voter sentiment but the campaign strategies of the candidates themselves. However, treating implied odds as gospel is a critical mistake.
Trader sentiment now echoes across mainstream media coverage, while polls, often sponsored by those very same news outlets, directly shape trader behavior on the board. In other words, markets and polls risk missing in the exact same direction.
The bottom line is that prediction markets offer no guarantees, nor do traditional surveys. Each provides distinct metrics and weighs different variables in an effort to gauge an inherently volatile electoral landscape.
Politics remains an unpredictable beast, and shocking outcomes like the Brazilian presidential race are proof of that. Come Tuesday, we will see how prediction markets hold up in this midterm cycle, one of the most fiercely contested and debated in recent memory.
