Many bookmakers invite punters to bet on the outcome of the next election. Bookmakers set and constantly adjust their odds so that the expected payout is less than the money that has been collected in bets, regardless of the outcome. As a consequence, these odds aggregate the wisdom of crowds. The odds reflect the collective assessment of the punting community on the probability of each party winning the next election.
From odds to election winning probabilities
Converting decimal odds to probability is straightforward. You divide 1 by the decimal odds, then multiply by 100 to get a percentage.
So odds of 2.50 give you 1 ÷ 2.50 = 0.40, or 40% probability.
The catch is that bookmakers build a margin into their prices, called the overround. If you add up the implied probabilities for every outcome in a market, the total comes to more than 100%. That extra slice is the bookmaker's edge.
To strip it out, you sum the raw implied probabilities across all outcomes, then divide each one by that total. This rescales everything so the probabilities add up to exactly 100%, giving you the bookmaker's "true" estimate of each outcome. In terms of Australian election outcomes, I use the following formula (where C is the Coalition's odds and L is Labor's odds).
\[Coalition_{probability}=\frac{\frac{1}{C}}{\frac{1}{C}+\frac{1}{L}}\]
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 an okay 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
I am collecting daily odds in the lead up to the 2028 Australian Federal Election. I will expand the odds I collect over time.
