Comments on: Ubber finance blogger Barry Ritholtz believes in magic. He believes that, with more volumes on the event derivative markets, comes the Omniscience —capital “O”.

By: If you want to increase the absolute accuracy of the outputs of the prediction markets, try (if you can) to increase the quality of the inputs. | Midas Oracle .ORG

Wed, 21 May 2008 09:03:23 +0000

[...] I have been telling that to Barry Ritholtz —but he stays on his position. [...]

By: Chris F. Masse

Chris F. Masse — Wed, 21 May 2008 08:31:58 +0000

@Barry Ritholtz: I disagree. To increase the absolute accuracy of the InTrade and BetFair prediction markets in the area of politics, what you need is to increase the accuracy of the polls —which is what the traders look at.
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Gallup et al., only, can help the prediction markets.

By: Chris F. Masse

Chris F. Masse — Wed, 21 May 2008 08:27:34 +0000

@Ashish Singal: When it comes to divining the future, higher volumes won’t help when the polls are wrong.

By: Barry Ritholtz

Barry Ritholtz — Wed, 21 May 2008 00:41:16 +0000

Now we get to the crux of the issue here –

We are in agreement that very often, markets fail to forecasts the result of specific events or outcomes. There are a variety of academic reasons as to why this is so.
According to Legg Mason’s Michael Mauboussin, one needs diversity, aggregation, and incentives – and I agree.
that is in a nutshell the problem with these smaller markets: one only achieves a broad diversity through a significant number of traders; one only attracts a large number of traders, through significant incentives; and by significant incentives I mean trillions not thousands of dollars.
Hence, the occasional failure of a prediction market, based on the relative small size, modest incentives, and lack of broad aggregation is neither the failure of magic nor markets: it is merely the inevitable outcome of the lack of size and volume these markets have.

Increase the volume, traders, and dollars at stake, and you will likely see an increase in accuracy.

By: Ashish Singal

Ashish Singal — Tue, 20 May 2008 23:59:50 +0000

While it is true that traders are no “magicians,” it is generally accepted in financial markets that the heavier the volume, the more you can count of a result being the true indication of market price. Intrade’s volume has a long, long way to go before it can withstand even just $10k worth of bets without moving significantly.