From odds to election winning probabilities
It is easy to convert the decimal odds used by online bookmakers to probabilities. All we need do is normalise the odds for the bookmaker's over-round. In terms of Australian election outcomes, I use the following formula (where C is the Coalition's odds and L is Labor's odds).\[p=\frac{\frac{1}{C}}{\frac{1}{C}+\frac{1}{L}}\]
Rather than build an over-round into their odds, betting exchanges charge a winner's commission (typically at 5 per cent of the winnings), before making a payout. To enable a comparison between bookmaker odds and betting exchange odds, I adjust the odds from betting exchanges to convert the winner's commission into an over-round. I do this with the following formula.
\[adjusted = ((original - 1) * (1 - commission)) + 1\]
Betting markets have proved to be a good predictor of election outcomes. But they are not infallible. In the 2015 UK election both the polls and the bookmakers got it wrong; both predicted a hung Parliament. The outcome was a conservative majority of 12 seats.
My data collection practice
On 9 August 2015, I began collecting the daily odds on the outcome of the next election from the bookmakers Ladbrokes, Sportsbet, TABtouch and William Hill. I added Crownbet and Luxbet on 12 August 2015, and the Betfair betting exchange on 16 August 2015.I aim to collect the odds in the morning each day (usually around breakfast time). If a site is down on a particular morning, I will have a second go at getting the missing odds later in the day.
