Revisiting the issue, almost one year later.

Lance Fortnow (University of Chicago) wrote:

So how did those predictions go? In short you can say the markets predicted every individual race correctly but got the senate wrong, but let us look a little more carefully.

At about 9 AM CST on the morning of election day I made a snap shot of the map for a Discovery Channel Website article.

Every state colored blue was won by a democrat and every state colored red went to a republican. But also note the 69% given to GOP (Republican) Senate control although this election will give control to the democrats. No outcome would have made all the states and senate control agree with the 9 AM map.

Were the markets inconsistent? No, because the markets predict not absolutely but probabilistically. For example, the markets gave a probability of winning 60% for each of Virginia and Missouri and the democrats needed both to take the senate. If these races were independent events, the probability that the democrats take both is 36% or a 64% chance of GOP senate control assuming no other surprises.

Of course the races were not independent events and there are other states involved making it more difficult to compare the probabilities of the individual races with that of senate control.

So how did the markets do as predictors? Quite well as the outcome seems quite reasonable given the markets. Other outcomes would have also been reasonable such as the Democrats losing Virginia and the senate remaining in republican hands, a possibility that came very close to happening.

Previous blog posts by Chris F. Masse:

• Professor Koleman Strumpf explains the prediction markets to the countryland people.
• Professor Koleman Strumpf tells CNN that a prediction market, by essence, can’t predict an upset.
• Time magazine interview the 2 BetFair-Tradefair co-founders, and not a single time do they pronounce the magic words, “prediction markets”.
• One Deep Throat told me that this VC firm might have been connected with the Irish prediction exchange, at inception.
• BetFair Rapid = BetFair’s standalone, local, PC-based, order-entry software for prediction markets
• Michael Moore tells the Democratic people to go Barack Obama in Pennsylvania (a two-tier state), but the polls and the prediction markets tell us that that won’t do the trick.
• CALLING ALL DEEP THROATS: What is it that Smarkets want to do in Malta, E.U.? And what will Smarkets market anyway?