Brazil Runoff Upset Shows Prediction Market Miss

Luiz Inácio Lula da Silva defeated Flávio Bolsonaro in Brazil's runoff election on Sunday and was re-elected as president, according to a report, in a comeback that defied the odds set by prediction markets. Platforms like Polymarket present themselves as forecasting the future by drawing on the wisdom of the crowd, but the report says they were horrendously off the mark on Brazil's election.

After the first round of voting on October 4, Polymarket odds that Flávio Bolsonaro — the son of former president Jair Bolsonaro, who is currently serving a 27 year sentence for leading a coup attempt — would win surged to over 80 percent, while Lula's chances bottomed out at a dismal 12 percent, the report says. Those favorable odds for Bolsonaro held for over a week, up to the day of the second round, with Polymarket odds that Sunday morning showing him at an 81 percent chance of winning.

Official election results showed Lula defeating Bolsonaro by 51.8 percent to 48.2 percent, which the report describes as a huge rebuff to a mounting right-wing wave in Latin America. Over $62 million in bets were placed on Bolsonaro winning, but his odds quickly collapsed to as low as 15 percent as the day went on and early polls trickled out, causing more bets in favor of Lula, according to the report.

The report cautions that a one-off upset doesn't in itself mean prediction markets don't provide some insight, comparing it to a clear day when a forecast showed an 80 percent chance of rain. But it says on-the-ground polling showed a tight race, while Polymarket's prediction data had Bolsonaro as an overwhelming favorite, and it notes that when Polymarket predicted a decisive Donald Trump victory over Kamala Harris in 2024, it was touted as a major coup over traditional polling that had the race as a toss-up.

The report says prediction markets' usefulness as a barometer of public sentiment, if not an actual means of feeling out the future, remains unclear despite what companies running them might claim. It describes them as hotbeds of insider trading, where massive wagers by a handful of wealthy bettors can distort odds and overpower the wisdom of the majority of the crowd, and says their credibility will face another major test during the upcoming midterm elections in November.