Why Prediction Markets Got the Brazilian Election So Wrong

Prediction markets got the results of Brazil's presidential election wildly wrong, with Polymarket putting Luiz Inácio Lula da Silva's chances at just 20% before election day, when he ultimately won out.  Experts say the whiff is the result of Brazil banning prediction markets in the country and a wave of retail investors diluting the expertise of the money on the line. Luiz Inácio Lula da Silva, commonly referred to as Lula, beat right-wing rival Flávio Bolsonaro in the Brazilian presidential election on Sunday. Bolsonaro came out ahead after the first round of voting at the start of October, but hadn't reached a majority, and a second round of votes was required. That second round is what Lula won, with a majority this time, and he will serve his fourth term as president. Going into election day, Lula hovered around a 20% chance of victory with Bolsonaro sitting at 80%, per Polymarket. Even once polls and results started to roll out, one Polymarket whale told Decrypt that the market was slow to push up the odds. "Sharps [a term for professional, high-stakes predictors] knew the market was mispriced, probably closer to 30-40% on [event] day. Mispricing was most evident during live trading, Lula was nearly a lock by 6:15 pm ET when Lula ‘Yes’ was 60c," pseudonymous Polymarket whale >FhantomBets said. "Retail traders were so against Lula that you could get unlimited size at 60-80c when Lula had [essentially] already won." Prediction markets settle at $1, with prices below that—such as $0.60 on a “yes” bet for Lula in Brazil’s election—providing implied odds of that event occurring. The Polymarket trader added that many whales, including himself, were selling off long-term positions to get liquid capital so they could add more size to the Brazil market. Essentially, FhantomBets is claiming that retail traders with less prediction market experience inflated Bolsonaro's chances right until the very end. Luke Nolan, senior researcher at CoinShares, pushed back on this notion and said Polymarket results reacted as polling results were released throughout the night. "I don’t think more users are inherently a problem. They can bring liquidity and different perspectives, including local knowledge. What matters is whether participation brings different information, and whether traders can act on it," Nolan told Decrypt