35: There Was a Huge Opportunity The Night of the Brexit Vote

Joe Weisenthal (0:08)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal, managing editor at Bloomberg Markets.

Tracy Alloway (0:15)

And I'm Tracy Alloway, executive editor of Bloomberg Markets.

Joe Weisenthal (0:19)

So Tracy, today's episode is going to be, I think, our first repeat guest since we've had the, since we've started the podcast.

Tracy Alloway (0:28)

Our first follow-up, right?

Joe Weisenthal (0:29)

Yeah, our first follow-up.

So, long-time listeners will remember several weeks ago, we had an episode all about the betting markets in the UK, political betting markets, and what people were gambling ahead of the Brexit vote. And, as you might have heard, most people got that vote just a little bit wrong.

Tracy Alloway (0:50)

Yeah, but not just, I mean, the betting shops didn't just get Brexit wrong. They kind of got it wrong in the face of a lot of evidence that was suggesting that it was going to be a lot closer, right? Some of the polls showed pretty much a 50-50 split right ahead of the vote.

And the betting shops still had the chances of remain much, much higher.

Joe Weisenthal (1:13)

Yeah, no, that was one of the remarkable things, which is that the polls never showed remain with a commanding lead, at least not in the last several weeks.

And yet both the gambling markets and just sort of the pure currency markets, as judged by the violent reaction we saw in Sterling in the wake of the vote, everyone was caught completely offside. And so you like to think, or one might think, that gamblers or financial markets somehow distilled the wisdom of crowds and that the wisdom of crowds is usually right. But as we can see, in this case at least, the wisdom of crowds was incredibly wrong.

Tracy Alloway (1:50)

Alright, so we're going to figure out exactly why they got it so wrong this time, right?

Joe Weisenthal (1:55)

Great, so with us now to talk about political betting markets and what they got wrong is Mike Smithson, the editor of politicalbetting.com. Thank . Mike, we had you on the podcast back in early May, and we talked about what the betting markets were saying for the Brexit vote. And suffice to say, the betting markets got it quite wrong.

What happened?

Mike Smithson (2:33)

I think everybody got it quite wrong. I think that we saw the polls that were coming out even right on the final day, was showing that Remain had a lead, and I think the betting markets were following those polls. And as it turned out, they were wrong. And people lost a lot of money who were actually gambling on that election, adding to the other travails of the actual outcome, but that's a different matter.

Tracy Alloway (3:02)

So I'm confused, though, because the betting markets are supposed to do something other than just reflect on the polls, right? They're supposed to add in their own calculations of probabilities and things like that. So what exactly went on here?

Mike Smithson (3:17)

Well, whatever those calculations were, those didn't actually apply. I should say that I didn't place any bets on the referendum for about three weeks beforehand, because I was getting a sense that things were a lot tighter than the polls were suggesting.

But other polls were not doing that. Now, what tends to happen on betting markets? As you get very close to election day, the actual market, the people actually betting, bonds out, so you're getting many more people, people who bet on horses, they bet on football, they bet on other sporting events. They tend to come into the betting market. And it has quite well recorded that this can have a distorting impact on the market. And they tend to look at it and they tend to follow the favorites. And my reading is that that's what happened here. I mean, it was actually quite ridiculous on the night as the results were coming in. It was blindingly obvious from the very first, the first areas to declare that this was going to go to leave.

And that was certainly what, you know, certainly my view of it and I was tweeting that. But the markets was sort of a half an hour, 45 minutes delay in terms of catching up with that reality, which was, which just appeared very strange to me. And I think it is simply that there was a very different sort of a gambler on the market, not the people with the political specialty.

Joe Weisenthal (5:02)

I noticed the same thing that night and I was tweeting about it that, you know, for example, right as soon as we got the results out of Sunderland and Newcastle too early on, and both of them were much worse for the Remain camp than by a large margin than anyone thought.