Is There "Free Money" in Polymarket's Presidential Market?
Prices for Trump and Harris add up to $0.99
If you add up the prices for Yes contracts for Donald Trump and Kamala Harris to win the US Election on Polymarket, you’ll get a total of 99.5 cents (in fact you can pick up hundreds of thousands of shares at that price).
Since these are the only two remaining viable candidates, this suggests that you could buy Yes on both candidates for $0.995 and “guarantee” yourself $1.00 as soon as the election is decided.
If the darling of this election cycle Polymarket is so inefficient that its traders don’t even realize that Harris and Trump are the two remaining candidates, how can it possibly be trusted on the much harder judgment of who is going to win the election? Maybe all those claims about “Scottish teens” and stupid betting markets are true. I’m starting to think Polymarket traders are just crypto bros who want Trump to win but can’t figure out how many candidates are in the race.
If you agree with that analysis, then go ahead, lock in your sweet sweet 0.5% return and call it a day. Or you could entertain the possibility that you might be wrong? Impossible, you say!
When a market appears to offer an obvious arbitrage within its own pricing, it usually means that the market is pricing in an event that you haven’t thought about. This is especially likely in a market as liquid as Polymarket.
To start off, realize that the current 0.5% shortfall is not a new phenomenon on Polymarket. Prices on Trump and Harris have consistently added up to less than $1.00 ever since Harris has entered the race, as the graphic below indicates. Notice, in fact, that the shortfall was larger a month ago, totaling more than 2%.
This is a small difference, but not small enough to ignore.
It indicates that the market is pricing in at least two different alternative outcomes to the most likely outcome of a Trump or Harris win.
The fact that the shortfall is decreasing as the election is nearing underscores that there is a meaningful signal in the Polymarket price, and that signal is decreasing as the election gets nearer. Most likely, that decrease is coming from whatever component in the shortfall is associated with the possibility that one of Harris or Trump could die between now and the election. As we see that the shortfall was about 1.0% in August and is now about 0.5% with 4 weeks remaining, this trend is consistent with a probability of about 0.25% per month that one of the candidates will die. Notice also that the shortfall increased abruptly to 1.8% in the days after September 15, the date of the 2nd assassination attempt on Trump.
From that estimate, the current shortfall is 0.5% one month before the election and the contribution of a candidate dying is estimated as 0.25% per month. This implies that the shortfall will be about 0.25% on election day. If neither of the candidates dies, then this 0.25% must be associated with a candidate other than Trump or Harris winning. But who?
Interestingly, this projected 0.25% election day shortfall coincides closely with the sum of RFK Jr’s and “Other Democratic” candidate’s price to win the election. Currently, each of these outcomes is priced at between $0.001 and 0.002 (0.1-0.2%) to win.
Even though RFK dropped out of the race and has endorsed Trump, and has virtually no chance of winning the electoral college, the race between Harris and Trump is extremely close. So close, in fact, that there is a small, but non-negligible, chance that neither Harris nor Trump gets a majority of electoral votes. If that were to happen, then the election would be decided by the House of Representatives. If that were to happen, it is plausible that a candidate other than Harris or Trump would emerge from the House of Representatives, especially considering how unpopular both Harris and Trump are. That candidate could be RFK or someone else entirely (accounting for the remaining 0.25%, according to the market price estimate).
Finally, I would add that the analysis above is only made possible because Polymarket offers prices in 0.1 cent increments, whereas many other markets are in full penny increments. Every other market could immediately improve their product by following Polymarket’s lead.