Author: Scotty Hendricks / Source: Big Think
- A new study finds that gamblers reacted more quickly to news on Brexit than currency traders.
- On the night of the referendum, gamblers and odds makers figured out what would happen hours before traders, experts, and the BBC.
- The results are bad news for the idea that markets are perfectly efficient.
Sometimes experts are wrong. This statement will shock some people and strike others as obvious. If we can’t turn to experts, who can we turn to for information? If a new study published in the International Journal of Forecasting is correct, gamblers might be useful, at least if you’re trying to predict paradigm-breaking election results.
How gamblers predicted Brexit when experts couldn’t
The 2016 Brexit referendum took the world by surprise. Most polls before the election gave Remain a slight edge and gambling houses gave Leave bad odds. Nobody really thought the British would vote to leave the EU.
During the vote, currency markets kept their eye on the changing estimate of the outcome and reacted violently when it became clear that a Leave win was likely. However, a new study out of Cambridge suggests that gamblers figured out what was going to happen an hour before the currency markets did, leading to a window where the difference between the betting market and FX markets got as high as 7%.
The authors built a retrospective forecasting model using information that was publicly available before the election and then fed the information that became available during the referendum into it. They concluded that “using data publicly available at the time we show that the financial markets were very inefficient, and should have predicted Brexit possibly over two hours before they actually did.”
It should be noted that the gamblers weren’t perfect either – they took longer than they should have to switch from having their money on Remain to putting it…
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