People near the eye of the storm in DC have a way of always getting drawn to one side or the other, with very few exceptions. Those biases also creep into the polling business, making the outcomes of American politics even less predictable than they already are, because the information becomes so suspect. Questions such as, “Does RasmussenReports have a hidden Republican bias?,” and “Does AP/Ipsos slant its polling to undermine the Republican position?,” and “How the hell did John Zogby ever become somebody in this business?” are always on the minds of us political junkies when we parse results of polls.
So it makes sense that people with a bigger stake than us — namely lobbyists, corporations, big donors, et al — would eventually make their way to the Intrade politics markets, to get what they perceive to be a more objective gauge of the political climate.
Unfortunately, the politics markets are still not very large. Any serious candidate who knows other people are basing decisions partly on Intrade numbers could easily throw the Intrade numbers out of whack with six figures’ worth of cash. Judging from the 2006 elections, $100,000 worth of marginal campaign advertising is virtually irrelevant in a campaign that spends more than a few million (just ask ex-Sen. Mike DeWine). Donations themselves are one measure of a candidate’s “inevitability,” but once the donation has been made, it will simply gather dust until a couple months before the first primaries, at which point it will compete with noise from everyone else’s campaign kitties. Much better to invest that money influencing numbers that are highly respected by observers. If it is effective in reinforcing the aura of inevitability, it will probably pay for itself, with plenty to spare. Even if it doesn’t pay for itself, a hundred grand of propping up your candidate on Intrade still reinforces that aura of inevitability, which is the more important point.
The Rhode/Strumpf study of the Wall Street 1880-1932 election market (which was orders of magnitude larger than today’s Intrade market) showed lots of manipulation going on by both parties on the market, to influence the public perception of “who the frontrunner was.”
An enterprising political campaign could easily be doing the same thing here. To what extent, it’s impossible to say. But some of the past perturbations in the Democratic nomination market have been very, very strange, exhibiting the exact opposite of conventional, profit-maximizing trader behavior.
Just something for interested parties to keep in mind when they are looking at Intrade numbers.
(cross-posted with editing from the TS Political Maven)
Medemi on
“political event markets”: political event FUTURES/DERIVATIVES markets
Historical Presidential Betting Markets
http://www.unc.edu/~cigar/papers/BettingPaper_10Nov2003_long2.pdf
I think it is largely a liquidity issue and I’m not sure what to make of Intrade prices at this point. I can tell you that I would have “corrected” a few prices including Gore’s run-up into the teens if it weren’t such a risk to move money there.
That said, I do think some of the literature on manipulation understates its viability because it doesn’t consider what happens when traders take the manipulated price as new information. And this is separate and primary to the actual self-fulfilling aspect, where some parties get non-monetary payoffs from price action, and that price action can have an effect on campaign decisions.
Chris — thanks for hunting down Prawf Strumpf’s paper.
Jason — for sure. If a market has become disproportionately momentum-driven (due to information asymmetry or groupthink), then that would mean that traders are taking other people’s trades as new information, not subjective distillations of the same information.
In this case, you have massive information asymmetry and lots of non-monetary payoffs for the people who are advantaged by that very same asymmetry. The result is somewhat analogous to a poker table of anonymous players, and someone makes an anonymous raise. There’s no way to judge the credibility of the raise, so theoretically the “dominant strategy” is to make the raise, or fold to someone else’s raise.
You could make the same argument for stocks and bonds, but the trader of a stock, for example, is really trading on a huge collection of events. Even if he’s just trading a single stock, his “unsystematic risk” is still much lower than the event trader’s, because the equities trader knows that there will be a distribution of events in which the good ones will largely cancel out the bad ones — except in the case of a single “major pricing event,” i.e., a quarterly report, when one piece of information is so important that it overrides all others. When you are just trading on a single person, you only have one stream of events to trade on, so the fluctuations are that much higher. (A multinational publicly traded company has tons of streams of events to affect its price, most of which end up canceling each other out).
In the cases I linked to, I judged it to be the same individual based on size and suddenness of the bet — really just groping for some consistency with which to identify the raiser. Plus, it was not “intelligent” trader behavior, because it incurred lots of unnecessary costs.
It’s so conjectural. Even if I was correct, that person has surely learned to better hide his tracks.
Silly me, grasping for fame and recognition only to give the game away
Didn’t Hanson and Oprea show that this sort of thing increases the return to informed traders and is actually good for the market?
Not familiar with the paper. As far as increasing the return to informed traders, yeah, I can see that
But I don’t think huge information asymmetry is “good for the market.” It’s kind of an apples and oranges situation, intuitively — if a market’s peculiars give rise to asymmetry, then the end point of that market, assuming no rent seeking (ha, yeah right) is simply going to be very different from the “long run equilibrium” of a conventional market.
The Hanson, Oprea and Porter paper is at http://dimacs.rutgers.edu/Workshops/Markets/oprea.pdf
Am finally listening to the Yahoo conference; I love the shoutout to Chris there (around the 49 minute mark)
Also, a long-term index market is going to be more susceptible to manipulation than a binary.
Hanson, Oprea and Porter paper:
http://hanson.gmu.edu/biastest.pdf