Alex Tabarrok writes that “-someone was manipulating Intrade to boost John McCain’-s stock price”-.
No…-!!!…-
John Delaney said that that firm has been hedging on InTrade —-a normal and beneficial activity on the other (larger and more liquid) financial markets.
InTrade is not liquid enough to weather (quickly enough) the impact made by the hedging activities, at this time, but will in the future, if growth continues.
Manipulation is bad.
Hedging is good.
– InTrade CEO John Delaney has conducted an investigation on the alleged manipulation. The suspicious moves in prices were in fact caused by the buying and selling made by an “-institutional”- trader (a hedge fund, I presume) who has been managing “-certain risks”- (hedging).
– Jason Ruspini, who wrote before this report came out, does believe that manipulations “-non-informational”- trades have been prevalent on InTrade. (We will see whether Jason changes his mind in light of InTrade’-s debunking report.)
A little explainer on my previous post, as I got some feedback on it.
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#1. Yes, the measure of the usefulness of an idea or theory is the number and the quality of web links it receives.
– Google PageRank (the engine powering the world’-s #1 media) organizes the world’-s information according to how many links go to one source of information, and how high the social status of those links are.
– A quality document posted on the Web is always linked to —-if it is not, it is not a quality document. Period.
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#2. The prediction markets should be useful to the experts [*] —-otherwise, they are useless and should be terminated (as a forecasting tool).
– The lovers of the prediction markets represent a little coterie of hyper-excited economists, free-market columnists, and opportunistic bloggers.
– The high traffic to the InTrade prediction exchange website is generated out of curiosity. This is the result of the free publicity performed by researchers who live off the trading data handed out by the InTrade executives —-it’-s a symbiosis (”-you pump up my exchange in the media- I help your academic career”-).
– For the happy few who understand the mechanism of information aggregation, the prediction markets are a tool of convenience: they get all the week’-s politics summed up in a number —-that spare them the need to read the newspapers. The problem with that behavior is that when there is an upset, those people don’-t understand why the prediction markets failed, because they didn’-t pay attention to the primary indicators.
– I am aware of the vapors of some dreamers, but the fact is the polls are still the main forecasting tool in politics —-and the main primary indicator of the event derivative traders. (Snake eats itself.) It’-s going to stay that way, I forecast.
– In an ideal world, the prediction market scholars should be able to point to situations where some prediction markets were very useful to society and to some other situations where the prediction markets were not useful at all. We need a hierarchy of the prediction markets —-based on their usefulness.
– Where are the evidence that our prediction markets provide decisive help to the experts?
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[*] “the experts” = all the experts but the prediction market experts (who are expert in nothing else than pumping up the prediction markets).
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APPENDIX
Robin Hanson:
[I]nfo value [] is the added accuracy the markets provide relative to other mechanisms, times the value of accuracy in improved decisions, minus the cost of maintaining the markets, relative to the cost of other mechanisms. A highly accurate market has little value if other mechanisms can provide similar accuracy at a lower cost, or if few substantial decisions are influenced by accurate forecasts on its topic.
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Prediction markets produce dynamic, objective probabilistic predictions on the outcomes of future events by aggregating disparate pieces of information that the traders bring when they agree on prices. These event derivative traders feed on the primary indicators —-i.e., the primary sources of information. (Garbage in, garbage out…- Intelligence in, intelligence out…-) Hence, prediction markets are meta forecasting tools.
Each prediction exchange organizes its own set of real-money and/or play-money markets, using either a CDA or a MSR mechanism.
A prediction market is a market for a contract that yields payments based on the outcome of a partially uncertain future event, such as an election. A contract pays $100 only if candidate X wins the election, and $0 otherwise. When the market price of an X contract is $60, the prediction market believes that candidate X has a 60% chance of winning the election. The price of this event derivative can be interpreted as the objective probability of the future outcome (i.e., its most statistically accurate forecast). A 60% probability means that, in a series of events each with a 60% probability, then 60 times out of 100, the favored outcome will occur- and 40 times out of 100, the unfavored outcome will occur.
The value of a set of prediction markets consists in the added accuracy that these prediction markets provide relative to the other forecasting mechanisms, times the value of accuracy in improved decisions, minus the cost of maintaining these prediction markets, relative to the cost of the other forecasting mechanisms. According to Robin Hanson, a highly accurate prediction market has little value if some other forecasting mechanism(s) can provide similar accuracy at a lower cost, or if very few substantial decisions are influenced by accurate forecasts on its topic.
Justin Wolfers:
Prediction markets can yield valuable insight into the dynamics of political campaigns, a conclusion we’-ve drawn from years of intensive study and research. We’-ve even proselytized about the value of these markets, extolling their ability to yield sharper insights than pundits or polls. […]
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If this statement were true,
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Both the mystification of the prediction markets (mudding the primary indicators into commentary- suggesting that the traders’- anticipations are always sound) and their demystification (listing the primary indicators) don’-t do the trick: Economic science should be able to tell us whether the prediction markets on 2008 US elections are of high social utility, and whether other kinds of prediction markets are of higher social utility. I am not satisfied by what I have been reading, as of today. The prediction markets are rather a tool of curiosity, as of today, not much a tool of forecasting. The prediction markets are not used as a tool by the experts —-by “-the experts”-, I mean all the experts but the prediction market experts (who are expert in nothing else than pumping up the prediction markets): the political experts, the financial experts, the management experts, the oil production experts, the credit experts, the health care system experts, the automobile market experts, the wine market experts, the web technology business experts, the web advertising experts, the medical drug experts, the foreign affairs experts, the military experts, the aviation industry experts, the condom industry experts, the restaurant industry experts, etc.
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APPENDIX
Robin Hanson:
[I]nfo value [] is the added accuracy the markets provide relative to other mechanisms, times the value of accuracy in improved decisions, minus the cost of maintaining the markets, relative to the cost of other mechanisms. A highly accurate market has little value if other mechanisms can provide similar accuracy at a lower cost, or if few substantial decisions are influenced by accurate forecasts on its topic.
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PREVIOUSLY: See Robin Hanson’-s take on Google’-s enterprise prediction markets.
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InTrade’-s PageRank is now 7 / 10 —-while all the other major prediction market firms are at 6 / 10.
Excellent analysis from the “-Punt”- blogger.
Serial bet winners are accused (that’-s the word) to withdraw money from the BetFair machine, compelling BetFair to attract new money from newbies at a high marketing cost, and thus BetFair has decided to tax those serial bet winners.
I wonder what a Harvard or Wharton MBA would think of this reasoning.
It is my understanding that, in the betting and gambling business, you are always trying to attract new blood to make up for the disillusioned gamblers that you are losing on a daily basis.
Am I correct, folks?
Why don’-t BetFair raise moderately the trading fees for everybody, or try to reduce the cost of the BetFair IT architecture by slashing out what has been unnecessary added by their IT maniacs?
Previously: BetFair impose new “Premium Charges”, and their very active traders are up in arms. – 2008-09-09
