Tag Archives: InTrade

Would InTrade or BetFair have done a better job predicting how many people would see the Barack Obama infomercial?

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As I disclose on the other blog (Midas Oracle .COM), the HubDub traders wrongly thought that the (Socialist) Barack Obama informercial would have be seen by &#8220-more than 50 million&#8221-. No, no, no, no. It was 33.5 million, according to Nielsen. The HubDub traders were too optimistic.

Would the InTrade or BetFair traders have done a better job? Jesus, that&#8217-s a difficult question. Which boils down (mainly, but not uniquely) to whether some experts on TV business were quoted in the media with some predictions. To investigate that, I have run a Google News search for news articles published before October 30. I haven&#8217-t seen any expert predicting how many viewers would get that infomercial. However, here&#8217-s what I spotted in the New York Times article published in the morning preceding the airing of that infomercial:

Ross Perot, the last presidential candidate to run similar programming, broadcast eight long infomercials to an average of 13 million viewers, with one of them getting 16.5 million viewers.

Hummm&#8230- Obviously, the HubDub traders were too cocky with their &#8220-50 million&#8221- figure&#8230- but should we blame them when, obviously (too), the Barack Obama situation circa 2008 is very different than the Ross Perot situation circa 1992?

The HubDub traders were not informed by the Ross Perot history. They simply made the bet that the Barack Obama infomercial would get as many TV viewers as the Third Presidential debate got (56.5 million). They predicted in a gregarious fashion. They lost.

I don&#8217-t think that the BetFair or InTrade traders would have done better. Do you?

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How many people will watch Barack Obama&#8217-s primetime address on 10/29?

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2008 US electoral college: What I am betting on.

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PollTrack:

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I like the way they color this electoral college map &#8212-with 5 colors only (simplicity is good). It is very clear and usable, I believe. You can see 6 states in gray (&#8221-too close to call&#8221-). I am heavily betting on Barack Obama for Florida and North Carolina. There will be a good payoff, next Tuesday &#8212-maybe. :-D

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Price for Alabama - Florida at intrade.com

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Price for New Jersey - Rhode Island at intrade.com

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Who will win Florida in the 2008 Presidential Election?

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Who will win North Carolina in the 2008 Presidential Election?

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Explainer On Prediction Markets

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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.

Each prediction exchange organizes its own set of real-money and/or play-money markets, using either a CDA or a MSR mechanism &#8212-with or without an automated market maker.

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), like the polls, for instance. (Garbage in, garbage out&#8230- Intelligence in, intelligence out&#8230-) Armed with these bits of information, the speculators then trade based on their anticipations, which will be either confirmed or infirmed. Hence, the prediction markets (which are more than just an information aggregation mechanism) are a meta forecasting tool.

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.

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More Info:

– The Best Resources On Prediction Markets = The Best External Web Links + The Best Midas Oracle Posts

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More Charts Of Prediction Markets

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Can InTrades prediction markets really contribute to solutions in avoiding future [financial] crises?

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The World Is Flat.

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To the question asked in the title of this post, some have answered by the affirmative (&#8220-Prediction Markets Have a Big Role to Play&#8221-). In my view, it is wrong to overvalue the real social utility of the prediction markets.

As of today, we can plainly see 2 things. Number one, the prediction markets are a tool of curiosity. People have heard about InTrade thanks to numerous news articles (where some prediction market researchers who get the InTrade historical data for free pump up the prediction markets as God&#8217-s right arm on Earth). At crunch time, the people teased by all this publicity flock to the InTrade website to satisfy their curiosity about the state of the horse race. Number two, a subset of the general population (made up of educated people who believe in the virtues of markets) use the prediction markets as a tool of convenience. Instead of spending long hours reading the various outputs by the pollsters and the commentariat, these people just check InTrade on a daily basis, because they know that it is primarily (but not only) an information aggregation mechanism. InTrade sums up the news of the day, so to speak. Hence, these people (in the know about how to benefit practically from the wisdom of crowds) don&#8217-t have to spend time gathering and analyzing the news of the day.

To the question asked in the title of this post, I&#8217-ll answer &#8220-no&#8221- &#8212-unless one of my readers can educate me more about the following issues:

  1. Did InTrade set up a set of prediction markets, in the summer of 2008, aiming at forecasting the (then) &#8220-upcoming financial crisis&#8221-? I am afraid that the answer is &#8220-no&#8221-.
  2. Did the World Economic Forum (a.k.a. Davos) manage to open the eyes of the 2,500 so-called &#8220-global leaders&#8221- (a grandiose denomination that includes many of the Wall Street CEOs, and, yes, some financial bloggers like Felix Salmon, invited to that Swiss annual grand Mess of the capitalism) about the financial instability that was already perceptible in the recent years? I am afraid that the answer is &#8220-no&#8221-. Now, ask yourself: If Davos can&#8217-t, what makes John Delaney think that he can?
  3. Is there out there at least one expert (by &#8220-expert&#8221- I mean any professional other than the so-called prediction market experts who are expert in nothing else than pumping up the prediction markets) who can demonstrate clearly that the prediction markets in his/her vertical have helped tremendously in his/her pursuit of creating long standing wealth? I am afraid that the answer is &#8220-no&#8221-.
  4. How come nobody called bullshit on InTrade CEO&#8217-s grandiose statement?
  5. How come Jason Ruspini, usually so critical, has become as servile as a poodle?
  6. Is Robin Hason the only adult in the field of prediction markets?

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I Told You So. - by Ed Miracle

I Told You So.

by Ed Miracle

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The New York Times on InTrades US political election prediction markets

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The NYT writers discusses 2 (different?) issues.

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#1. There was market arbitrage opportunies in the recent past between InTrade and BetFair &#8212-unlike 4 years ago, and contrary to the laws of economics.

– The price of the Barack Obama event derivative was cheaper on InTrade than on BetFair and the Iowa Electronic Markets. Conversely, the price of the John McCain event derivative was more expensive on InTrade than on BetFair and the Iowa Electronic Markets.

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#2. The NYT writer reports (without linking to it) the findings of the InTrade investigation about the behavior of their unnamed &#8220-institutional investor&#8221-.

– InTrade CEO John Delaney suggests that that institutional investor:

  1. might operate on InTrade at specific times where it might not be able to find liquidity on BetFair and/or IEM-
  2. might be a bookmaker willing to hedge its risks on a prediction exchange (a.k.a. betting exchange).

– Justin Wolfers&#8217- PHD student remarks that that institutional investor is not making an effort to shop around for the best prices, within each InTrade political prediction market.

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RELATED: See the comments on Midas Oracle here, here, here, and here.

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Are recent historical charts now useless for short-term prediction market analysis because of the non-informational trades made by that institutional investor hedging its political risks on InTrades election prediction markets?

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How can you assess the impact of Colin Powell&#8217-s endorsement of Barack Obama? You can&#8217-t.

InTrade offers an explanation of strange trading.

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Intrade has made a statement on the unusual trading that many have noted and alleged to be manipulative. The statement suggests that the price action is mostly attributable to a single firm, a hedger &#8220-using our markets in good faith and in the ordinary course of their business.&#8221-

The first company that comes to mind is Centrist Messenger. Centrist is an interesting firm that re-sells political ad time and refunds sales to customers whose candidate loses. Centrist has stated publicly that it uses Intrade to hedge this exposure.* If Centrist had something to do with the unusual trading, it suggests that they sold more Obama than McCain ads, creating exposure to a GOP victory, resulting in McCain buys and Obama sales on Intrade. Why such a firm would be such urgent price-takers isn&#8217-t fully explained.

Whether or not it was Centrist isn&#8217-t important, but as these markets mature we should expect them to attract more hedging activity, and this might introduce persistent price distortions. Indeed it makes sense for people in the top tax bracket to be long Obama apart from considerations of his chances of victory. This is another uncomfortable subject that I&#8217-ve warned about in the past. When these markets become deeper and more widely available, the odds of the high-tax candidates might begin to show an upwards bias, a risk premium. Interestingly, Musto and Yilmaz predict that such markets will eventually lead to increased promises of redistribution by candidates. Talk about unintended consequences.

Intrade is doing the right thing here though, dealing with tough issues realistically and with as much transparency as possible. They provide valuable information, for free, even in places where they are not necessarily welcome. The depth of this information helps us to evaluate Intrade prices and have more confidence in them. Here is an example below, based on Obama&#8217-s market over the past two weeks. Some have noted that the purported attacks occurred in hours where the market was unusually thin. This chart measures such price manipulability. The red line represents the ease of a downwards attack. It is the 100 x the amount of margin required to sweep the top fifteen bids divided by the difference between the highest bid and the fifteenth highest bid. (That is, how much the probability of an Obama victory can be moved by risking $100. Commissions are not taken into account but would of course would be vital.) The green line is the ease of an upwards attack. This is a very preliminary study and I will leave it to others to voice initial impressions. The fact that we can gauge to what extent traders are exercising market power is in itself important and encouraging however.

* Technically another firm does the trading. Centrist is incorporated in the US, and the trading firm is incorporated in St. Kitts. Through this arrangement, Centrist cleverly avoids violating UIGEA.

[Cross-posted from Risk Markets and Politics ]

The blogger at Marginal Revolution misinforms the public by repeating the misinterpretation thrown around by liberal hack Paul Krugman about the alleged manipulation on the InTrade prediction markets.

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Alex Tabarrok writes that &#8220-someone was manipulating Intrade to boost John McCain&#8217-s stock price&#8221-.

No&#8230-!!!&#8230-

John Delaney said that that firm has been hedging on InTrade &#8212-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.

There is no manipulation going on in the InTrade political prediction markets.

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– 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 &#8220-institutional&#8221- trader (a hedge fund, I presume) who has been managing &#8220-certain risks&#8221- (hedging).

– Jason Ruspini, who wrote before this report came out, does believe that manipulations &#8220-non-informational&#8221- trades have been prevalent on InTrade. (We will see whether Jason changes his mind in light of InTrade&#8217-s debunking report.)