Daily Archives: November 9, 2006

Speculating (and hedging?) on US presidential prediction markets would have social utility. Dixit Robin Hanson.

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If Deep Throat is right and the CFTC has indeed already given its stamp of approval to presidential prediction markets, then HedgeStreet and USFE would be well advised to listen to professor Robin Hanson&#8217-s idea with great attention:

Using data from a site like Tradesports.com to forecast who will win an election is just scratching the surface, said Robin Hanson, associate professor of economics at George Mason University in Fairfax, VA, and one of the founders of the field of prediction markets. Although the economic incentive is high for picking a winner, Hanson would like to see prediction markets forecast the consequences of a candidate getting into office. Will unemployment go up or down? Will we have more or less trouble in Iraq? Will we decrease or increase the deficit? &#8220-The social value of telling people who&#8217-s likely to win is questionable. The social value of telling people the consequences is arguably far higher,&#8221- said Hanson.

My Question To Professor Robin Hanson: The prediction market that would be interesting would be the one featuring the elected candidate (the so-called &#8220-President-Elect&#8221-). But the expiry of the other prediction markets, featuring the defeated presidential candidates, would be impossible to judge, since these presidential candidates by definition won&#8217-t take office and have any power on the US government. And if the game is murky, you won&#8217-t find any traders willing to risk his/her shirt on those kinds of US presidential prediction markets.

Addendum: Robin Hanson has posted a comment, and I republish it here for everyone to see&#8230-

Let U = the unemployment rate, D = Democrats win, and R = Republicans win. An exchange rate between “Pays $U if D” and “Pays $1 if D” gives an estimate of E[U|D]. Similarly, an exchange rate between “Pays $U if R” and “Pays $1 if R” gives an estimate of E[U|R]. We can compare E[U|D] and E[U|R] to see which candidate is expected to have a lower unemployment rate. And we know how to pay off all of these assets, no matter what happens.

Robin Hanson would like to see prediction markets forecast the consequences of a candidate getting into office. – REDUX

The TradeSportss NKM scandal vs. the BetFairs 2006-Senate case

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JC Kommer was prompt to comment on my 2006-Senate piece:

Double standard Mr Masse.
Betfair is doing exactly the same thing that Tradesports in the NKM “scandal”, going for the literal reading of the rules as they should.

My Answer To JC Kommer:

I disagree.

NKM Scandal: TradeSports made two grave errors. Number one, they engraved in marble that they would rely ON A SINGLE SOURCE OF INFORMATION (the US DOD) for the expiry of the contract. This is totally crazy. The truth should be established using as many reliable sources as possible or appropriate (including second-hand but reliable sources like the White House, which is fed by the DOD on military issues). What matters is the truth, gathered from multiple sources, not one particular source that could have an irrational or secretive behavior at some specific times. Number two, while establishing this one-single-source-for-expiry contract, TradeSports was not aware of the well known and public fact that the US DOD never issues detailed statements on North Korea matters. Information about North Korea is &#8220-classified&#8221-. Logically, the US DOD did not confirm directly and in a very formal way that North Korea fired missiles. (Note that a case can be made that the US DOD did indeed confirm the North Korea firing of missiles, directly and in an elliptic way, which many observers found it satisfying enough for expiry purpose). So, in my view, as I have described above, TradeSports made two grave errors. They apologized to their traders, but they did not take action to compensate the victims of their two errors. The victims here are the &#8220-yes&#8221- speculators on the NKM prediction market. They were correct in their prediction, but they lost their shirt in the end. Note that the &#8220-yes&#8221- bettors and virtual speculators at BoDog and NewsFutures were justly gratified for their accurate prediction on the NKM topic. Which shows once again that the problems originated from TradeSports, and not from the &#8220-yes&#8221- speculators. TEN CEO John Delaney (managing TradeSports) should have compensated the victims. Instead of that, the first action he took on the Monday when the scandal broke was to retaliate against Chris Masse, who gave airtime to the screwed-up &#8220-yes&#8221- speculators.

2006-Senate Case: There are no &#8220-victims&#8221- here, since BetFair sticks with the ORIGINAL contract &#8212-as CLEARLY written ON DAY ONE on their &#8220-RULES&#8221- tab, and as understood correctly by everybody who can read plain English. NO SURPRISE, NO CONTROVERSY. “Which of these parties will have MORE SEATS in the US Senate following the 2006 US Senate Elections?” is a very different question than &#8220-Which of these parties will CONTROL the US Senate?&#8220-. There is no ambiguity in the first question. In the second question, it&#8217-s understood that you could control the US Senate with your allies (the Independents).