I think so*, although it could be a matter for states to decide, and not so much the federal government. In that scenario, my thought is that some liberal (in the classic sense) states will allow experimentation with prediction markets, and the informational value (at least over surveys and polls) will eventually sweep the nation. But that could take decades.

I was thinking about the constitutionality of prediction markets when reading Gary McDowell&#8217-s &#8220-The War For the Constitution&#8221-:

Warren Burger summed it up for many when he described Mr. Bork as simply the best qualified nominee in the former chief justice&#8217-s own professional lifetime &#8212- a span of years that included the appointments of such judicial luminaries as Benjamin Cardozo, Hugo Black and Felix Frankfurter. Such praise was no empty exaggeration.

A former Yale law professor and U.S. Solicitor General, Mr. Bork was, at the time of his nomination, a judge on the United States Court of Appeals for the District of Columbia Circuit. When he was a circuit court judge, Mr. Bork&#8217-s opinions not only were never overruled on appeal, but on several occasions his dissents were adopted by the Supreme Court as its majority view.

In an earlier day such an appointment would have been celebrated as adding breadth, depth and luster to the highest bench. Instead, the nominee faced a mauling by those who set out not only to destroy him personally but to discredit all that he stood for as a jurist.

It was immediately clear that the unprecedented vote of 58-42 against his confirmation reflected something far more historic and fundamental than an ordinary partisan standoff. The confrontation in fact had been one of the most cataclysmic and divisive events in American domestic politics during the second half of the 20th century. The reason was that Mr. Bork&#8217-s opponents succeeded in making the fight over his nomination into a contest over the future of the Constitution.

* * *

Time has shown that Mr. Bork&#8217-s theory of constitutional interpretation remains very much alive- he was defeated but his central idea was never discredited. That theory of interpretation and its implicit belief in restrained judging should continue to guide anyone who believes that the inherent arbitrariness of government by judiciary is not the same thing as the rule of law.

One thing that is more scary than irrational voters is whimsical judges. And I know a few, personally.

*Off the top of my head, free speech and peaceful assembly seem to enable our rights to prediction markets.

UPDATE: Chris Masse linked prediction markets to the right to privacy here last year. I&#8217-m not sure that is as relevant as speech and assembly&#8211-the whole point being prices from prediction markets is a public good (even as I concede that the anonymity of traders improves prices). But what do I know&#8211-I&#8217-m not an attorney or judge, just someone who knows a lot of them.

UPDATE: Tom Bell, on the Constitution&#8217-s call for progress in science and arts.

UPDATE: Alvin Roth, on the repugnance of markets (including prediction markets in terror). This reframes my point&#8211-constitutional repugnance is good, fleeting cultural repugnance is irrelevant. Just as slavery markets were not repugnant yesterday (but unconstitutional), so prediction markets are repugnant today (but constitutional)!

Cross posted from Caveat Bettor.

Read the previous blog posts by Caveat Bettor:

• The Democrat SC Showdown: Intrade v. Zogby
• Zogby beats Intrade in predicting Nevada caucus winner Clinton.
• The GOP SC and Dem NV Showdown: Intrade v. Zogby
• Latest Intrade v. Zogby contest is up.
• Who said prediction markets were perfect?
• Intrade markets and Zogby polls agree in New Hampshire
• The Iowa Showdown: Zogby v. Intrade

It&#8217-s the same each time with progress. First they ignore you, then they say you&#8217-re mad, then dangerous, then there&#8217-s a pause and then you can&#8217-t find anyone who disagrees with you.

&#8211- Tony Benn

Cross-posted from Caveat Bettor.

Read the previous blog posts by Caveat Bettor:

• The Democrat SC Showdown: Intrade v. Zogby
• Zogby beats Intrade in predicting Nevada caucus winner Clinton.
• The GOP SC and Dem NV Showdown: Intrade v. Zogby
• Latest Intrade v. Zogby contest is up.
• Who said prediction markets were perfect?
• Intrade markets and Zogby polls agree in New Hampshire
• The Iowa Showdown: Zogby v. Intrade

I recently completed a new research paper studying how interest rates of different maturities change with market expectations of what the Fed is going to do next.

Settlement on a fed funds futures contract is based on the average effective fed funds rate over each of the calendar days of a specified month. If a month contains N calendar days and r_t denotes the effective fed funds rate on date t, settlement of the contract is based on the value of

(r₁ + r₂ + &#8230- + r_N)/N.

My latest research paper uses just the spot-month contract, whose payoff is based on what the current month&#8217-s average fed funds rate turns out to be. Suppose that the Fed raises the target by 50 basis points on the 16th day of a month containing N = 30 calendar days. If the target change doesn&#8217-t alter the fed funds rate for days 1 through 15, it would only raise the average effective rate over the month by 25 basis points, since half the observations that go into the average would be at the lower rate. If market participants had previously been assuming there would be no change at all, and then learned on some day t early in the month that the change was coming on the 16th, we would see the fed funds futures rate move on day t by 25 basis points, even though the market knows a 50-point hike is coming, as a consequence of the averaging. If we wanted to infer the change in the market&#8217-s expectation of the fed funds target from the change in the spot-month contract, we would need to multiply the observed spot-month contract change by 2. In general, for a month in which the target change, if it occurs, will come on day n of the month, a paper by Oberlin Professor Ken Kuttner published in the Journal of Monetary Economics in 2001 used such reasoning to propose that the change in the market&#8217-s expectation of the target might be measured by

(DF)(N)/(N – n + 1).

where DF is the observed change in the spot-month contract.

There are a couple of concerns that Kuttner and others have raised about this expression, however. For one thing, it does not take into account the fact that the effective fed funds rate (on which the futures contract payoff is based) is not exactly the same as the target rate itself. There are often quite significant deviations towards the end of the month, and the formula above would severely amplify this end-of-month measurement error. Furthermore, although there are some months when everybody knows exactly when the change, if there is to be one, is going to occur, there are also other months where we really don&#8217-t know, and some times when a target change did occur but was not announced, and the market did not immediately realize it. We speculated here at Econbrowser as to whether this could have happened this August, and a paper by Poole, Rasche, and Thornton discusses a number of other historical episodes.

My latest paper generalizes Kuttner&#8217-s formula in three directions. First, I explicitly model deviations between the effective rate and the target, and show how to modify the formula to take into account this measurement error. Second, I take the view that markets may be gradually learning about the target change well before it actually occurs. And third, I ask what the data would look like if the econometrician does not assume to know the exact date on which the target was changed.

These modifications imply a certain pattern for the volatility of daily changes in the spot-month futures contract over the days of the month. The volatility generally should decline during the month, as uncertainty becomes resolved as to what this month&#8217-s target is going to be, but then increases again a bit at the end of the month due to the greater volatility of deviations of the target from the actual on those days:

On the basis of the observed volatility of fed funds futures and the effective fed funds rate, the framework then implies a generalization of the Kuttner weights one should use to multiply an observed change in the spot-month futures contract to infer the change in the market&#8217-s expectation of the target. The relation is not monotonic. The ideal weight initially increases as one gets farther into the month, for the same reason as the original Kuttner formula. But it then starts the decrease in the last third of the month, because it is more likely that spot-month changes on those days are driven by noise in the effective fed funds rate rather than news about the target itself.

The model then implies a prediction as to what sort of response one should see of an interest rate such as the 1-year Treasury yield to a given change in the spot-month contract. Since it is the target itself, and not deviations between the effective rate and the target, that will matter for longer term yields, the coefficient from a regression of the change in yield on the spot-month change should show exactly the same calendar pattern as the figure above. The following figure reproduces the predicted pattern (the smooth red line), as well as the actual estimated coefficients when days of the month are grouped into octiles based on calendar date. The prediction seems to fit the facts reasonably well.

One thing we obtain from such calculations is an estimated average extent to which interest rates of various maturities respond to news about what the Fed is gong to select for the target for the current month. I found that a 10-basis-point increase in the expected target was on average associated with a 6- or 7-basis-point increase in Treasury yields at horizons up to 3 years, and a 4-basis-point increase even for a 10-year horizon. Although the methods and data sets are rather different from those of earlier researchers, these estimates are very similar to those obtained by earlier researchers. The consistent finding in this literature has been that changes in Fed policy have surprisingly long-lived consequences.

Cross-posted from EconBrowser.

I recently published some thoughts resulting from the NYC Prediction Market Conference.

There were three items:

1. Contract Content which discusses &#8220-whether having related content and links appear alongside a contract make any difference as to how well informed the traders are when trading that contract … and therefore, does it have any impact on the price of that contract?&#8221-

2. Losing the Market in Prediction Markets talks about the recognition that the desire for simpler trading interfaces in the prediction market community is finally leading to real results, as an abundance of sites, if not every PM site, looks to make predicting easier to do, and understand.

3. Shapers and Voters reflects on a slide about trader distribution in Jed Christiansen&#8217-s presentation.

I hope you enjoy.
~alex

When publishing its results for the year ended 30 April 2007, Betfair said that it was in a &#8220-Very strong cash position with 180m stg of corporate funds at the year end in addition to 174m of client funds held on trust in seperate ring fenced accounts.&#8221- 174m sitting in a bank for a year, would, with an interest rate of 5.5% yield 9.6m. A radical thought, I know, but isn&#8217-t it time that the company began to pay interest to those that have money on deposit with it?

A second interesting aspect of Betfair&#8217-s recent results, concerned its disclosure that Timeform, which it acquired at the end of November 2006, for around ?15m, had &#8220-made a small loss in its first five months of trading after acquisition.&#8221- There are grounds for questioning the strategic viability of this acquisition, but perhaps what is most interesting, is the fact that Betfair is not exploiting a rich vein of content that is parked on its own servers.

Betfair is sitting on the most comprehensive database of information pertaining to the workings of the horse racing and sports betting markets ever compiled. Rather than give snippets of this information to some fat cat academic, who will then publish it in a weighty tome, priced well beyond the reach of the average punter, Betfair should release as much of it as is feasibly possible to the betting public.

Such an act would serve to give credence to the company&#8217-s claim that is has revolutionised the betting industry. Failure to do so, may leave it open to the charge that such information is being exploited by its employees, at the expense of the average punter in the street.

As a company that has consistently positioned itself as a radical alternative to traditional bookmakers, Betfair seems somewhat shy when it comes to disclosing which of said bookmakers, use it&#8217-s exchange as a hedging mechanism. It was recently alleged, for example, that Interactive Gaming Holdings, the owner of PremierBet and Heathorns, went to the wall owing Betfair the sum of 250K. And IG Index recently said that its sport business achieved revenue growth of 37%, to ?6m, with a component of this growth being their new business of market making into the betting exchanges- with revenue for the six months to 30 November 2006 coming in at ?650,000. Those that trade on Betfair are entitled to know who it is they are competing with – Time for full disclosure.

A final point concerns situations where betting markets are suspended due to fradulent activity. Is it right that Betfair should benefit from such markets, through the holding on to commission that it has earned on the market?

Four simple points- interest payments on all deposits- the opening up of its databases- the disclosure of all betting and spread betting companies that use its exchange- the return of commission that has been earned on fradulent markets. If Betfair does not implement them, then its competitors should.

[Cross-posted from Betting Market]

Strategists who want to know when a strategy is effective should pay attention to the market. Here is one losing strategy Edwards should drop:

According to Intrade.com, every time the Edwards presidential campaign (via Elizabeth Edwards) tries to engage Coulter in a catfight, his price plummets. His lowest point was after Elizabeth Edwards&#8217- &#8220-surprise&#8221- call-in to Hardball with Chris Matthews in June 2007.

Mr. Giuliani might want to check out intrade before he takes anymore calls mid-speech.

Cross posted from NastyBrutishAndTall

Betfair will this week announce its results for the year to 30 April 2007.

The past twelve months have seen a significant increase in the rate of investment by Betfair, as the company has sought to not only consolidate its position as the world&#8217-s leading betting exchange operator, but also, to broaden its product portfolio, so as to create a one-stop-shop solution for online gambling, under the Betfair umbrella.

Betfair&#8217-s Australian based betting exchange went live at the end of August 2006- and in recently filed accounts, Betfair&#8217-s Australian partner PBL (50%) said that the business continues to build critical mass in its first full year of operations, and that its share of after tax losses for the year was $2 million.

In October 2006, Betfair Poker left CryptoLogic Inc. to move to an in-house technology solution- whilst in July 2007 Betfair announced that it had executed a non-binding Letter of Intent with Harrah’s License Company LLC, an affiliate of Harrah’s Entertainment, Inc which designated Betfair.com as the “Presenting Sponsor” of the World Series of Poker (WSOP) Europe through 2011.

In October 2006, Betfair broadened its product portfolio with the launch of an online casino. This followed the previous launch of Baccarat (launched June 2006), Blackjack (launched November 2005), Jacks or Better, Roulette and Omaha Hi (launched April 2007)- all with zero house edge.

At the end of November 2006 Betfair announced that it had acquired Portway Press Limited, the owner of Timeform for somewhere in the region of ?15m.

Looking ahead, Betfair will launch its betting exchange service in Italy and will also enter into the area of financial spread betting.

A decline in revenue growth and profitability is anticipated- with profit before tax likely to be down somewhere in the region of 33%.

There are those that will argue that the company should have stayed focused on its core betting exchange business- and I for one must question whether the company&#8217-s investment in online poker is going to reap the forecast dividends.

[cross-posted from Betting Market]

Here, courtesy of Inkling Markets. It&#8217-s only $5,000 of play money per trader. But that&#8217-s still a start, so please sign up and let&#8217-s see if we can make the world a better place (i.e. do we invest more in this issue or other issues).

Let me know if you have improvement suggestions. Thanks in advance!

Cross-posted from Caveat Bettor.

Read the previous blog posts by Caveat Bettor:

• The Democrat SC Showdown: Intrade v. Zogby
• Zogby beats Intrade in predicting Nevada caucus winner Clinton.
• The GOP SC and Dem NV Showdown: Intrade v. Zogby
• Latest Intrade v. Zogby contest is up.
• Who said prediction markets were perfect?
• Intrade markets and Zogby polls agree in New Hampshire
• The Iowa Showdown: Zogby v. Intrade