In an ideal world, the prediction market traders should have been informed about the low esteem of the Chicago candidacy. They were not. They were duped by the mass media who misinformed them.

Rio and Madrid were in fact the 2 strong candidates. Chicago and Tokyo were the losers.

In this kind of 3-round contest, you need to be ahead of the pack and attract more supporters in the next rounds.

Chicago was the worst candidate. THE WORST. Nevertheless, the prediction markets favored Chicago. The IOC is an opaque organization.

The prediction markets were very clear: either Rio or Chicago would be chosen; Madrid was not going to be chosen, Tokyo was not going to be chosen. (And also the UK betting houses, which suggest similar probable outcomes: either Rio of Chicago.) The Chicago bet was a risky bet that offered to pay at 2-to-1 if it won. Rio at 45 was similarly a risky bet paying off just better than 2-to-1. Together they were nearly a sure thing – this is the information that the prediction market prices shows.

Yes, Chicago received the lowest number of votes in the first round, but that doesn’t mean it was the least likely outcome of the voting process. Neither Madrid nor Toyko gained much in the second and third round ballots. They each had about 1/4 of the voters, and that was all they were going to get. We don’t know what would have happened had Rio been knocked out in the first round, but it is plausible to think that Madrid and Toyko remain stuck at about 1/4 each and Chicago emerges as the selection.

Paul Hewitt has the best analysis:
http://www.midasoracle.org/2009/10/06/olympics-chicago-paul-hewitt/
http://www.midasoracle.org/2009/10/06/17849/#comment-27306

The fact is that the InTrade and BetFair probabilities should have reflected Chicago’s true chance. If it was a toss up between Rio and Chicago in the first round, and then a fight in the second and third round, the Chicago probabilities should have reflected that. They did not, because the prediction market traders were not informed well enough.
http://www.midasoracle.org/2009/10/06/17849/

Let’s set up a poll to see what readers think.

I’m persuaded by J.C. Bradbury’s remarks at Sabernomics. Much better analysis than anything I’ve seen on the subject elsewhere. You should study his analysis more closely.