Betting on politics: Betfair vs the bookies

Matthew Partridge compares betting exchanges to traditional bookies for betting on politics.

In the past, betting on politics waspretty straightforward. You went to thebookmakers, looked at what bets theyhad on offer and put down cash on anywhere the odds seemed attractive.This sounds simple, but it had acouple of disadvantages.

First, politicalbetting is a niche interest comparedwith other betting markets. So apartfrom some major events, like generalelections and leadership contests,there were very few opportunitiesavailable. Second, the bookies tookadvantage of the lack of competitionto increase the over-round that is, theamount that you would lose if you beton every possible option (which is howbookies make their money). So oddsgenerally did not offer good value.In 1999, an American firm calledIntrade arrived to shake up the scene.

It set up a betting exchange calleda prediction market that matchedpunters who were willing to takeopposite sides of a bet, in return for asmall commission. In many cases thisdramatically reduced the over-round,especially in the most popular markets.

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It also enabled bettors to trade in andout of positions, allowing them to takeprofits on bets where the odds hadshifted in their favour. A year later theUK company Betfair was set up andrun along similar principles. Intradehas since shut down, but Betfairmerged with bookie Paddy Power andremains in business.

Betting exchanges generally offerbetter odds and a wider choice.However, they can offer worse valuein markets that aren't heavily traded.Some bookies also view politics asa loss leader, and are willing to offernovelty bets at attractive odds to gain publicity. So sensible betting involveskeeping an eye on both.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri