Yearly Archives: 2006

Faulty polls screw up the political prediction markets. – REDUX – The no polls case, now.

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Two days ago, I stated brashly that political prediction markets aggregate the polls, mainly. (Mike Linksvayer nuanced my propos, in the comment area.)

GOP Keeps Senate, Loses House, Betting Site Says. – [US political prediction markets] – by Ronald Kessler – 2006-10-24

One theory is that prediction markets are influenced by the results of opinion polls. But if that were true, individual polls would also influence each other. Moreover, long before the Internet and opinion polls came into existence, election betting was accurately predicting election outcomes. From 1884 to 1940, betting was conducted on Wall Street by specialized brokers called betting commissioners. The betting odds for each candidate were published daily in the New York Times and other papers. The so-called New York betting markets correctly predicted 12 of the 13 presidential elections between 1884 and 1940, according to Koleman S. Strumpf, Koch professor of economics, University of Kansas School of Business, who co-authored a paper examining the markets. In the one exception, the betting swung to even odds by the time the polls closed. The Gallup Poll, the first scientific opinion poll, began in 1935. The arrival of opinion polls and stricter anti-gambling laws drove out the New York betting markets. The Internet has led to their revival.

Paper: Historical Prediction Markets: Wagering on Presidential Elections – (PDF) – by Paul W. Rhode and Koleman S. Strumpf – 2003-11-10

My Question: Before 1935 (that&#8217-s when George Gallup crafted the first scientific polls), what the hell those political prediction markets were aggregating, for Christ&#8217-s sake??? And where is our good doctor Koleman Strumpf when we need him?

Previous blog posts by Chris F. Masse:

  • Become “friend” with me on Google E-Mail so as to share feed items with me within Google Reader.
  • Nigel Eccles’ flawed “vision” about HubDub shows that he hasn’t any.
  • How does InTrade deal with insider trading?
  • Modern Life
  • “The Beacon” is an excellent blog published by The Independent Institute.
  • The John Edwards Non-Affair… is making Memeorandum (twice), again.
  • Prediction Markets = marketplaces for information trading… and for separating the wheat from the chaff.

BetFair fixes the corruption that it suscitates (since short selling could be used by cheating athletes or jockeys).

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From Andrew Gelman:

In a letter published in the latest New Yorker, Douglas Robertson writes,

James Surowiecki, in his column on sports betting, writes, &#8220-How much difference is there, after all, between betting on the future price of wheat . . . and betting on the performance of a baseball team?&#8221- (The Financial Page, September 25th). Future markets in products such as wheat allow famers and other producers to shield themselves from some financial risks, and thereby encourage the production of necessities. In this sense, the futures markets are more akin to homeowners&#8217- insurance or liability insurance than to gambling on sports. But there is no corresponding economic benefit to betting on sports- on the contrary, there are serious costs involved in protecting the sports activities from fixing and other corruptions that invariably accompany such gambling activity.

This is a good point. I enjoy gambling in semi-skill-based settings (poker, sports betting, election pools, etc.), and betting markets are cool, but it is useful to step back a bit and consider the larger economic benefits or risks arising from such markets.

My Take: They are both misinformed. With an ethical real-money prediction exchange (a.k.a. betting exchange), this problem is easily solved. As I reported last month, BetFair has signed memorandums of understanding with TWENTY FOUR sports bodies. If the BetFair managers spot manipulation attempts, they will report the villains&#8217-s mischiefs to the sports bodies and, possibly, to the Police, too. How do you like that, Andrew Gelman?

Addendum (October 30): Andrew Gelman published a blog post on Midas Oracle, in response.

Prediction markets vs. Experts (a.k.a. pundits)

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Via betting expert Niall O&#8217-Connor, this Slate piece:

But in the run-up to this year&#8217-s midterms, Intrade futures prices are everywhere. RealClearPolitics offers &#8220-Live Intrade Quotes&#8221- alongside its polling summaries. HuffingtonPost now posts them on the front page in a snazzy, multicolored bar graph. The HuffPo graphics won&#8217-t help with Tradesports/Intrade&#8217-s defense. The headline shouts &#8220-Midterm Betting Odds,&#8221- and the caption adds, &#8220-Odds based on people betting real money on the Tradesports website.&#8221- Is betting real money on the midterms a form of online gambling?

My Answer: No. TradeSports-InTrade is a prediction exchange, which can give more objective outcome probabilities than bookmakers or sportsbooks, and the Huffington Post does a diservice to the public in presenting that as &#8220-betting odds&#8221-.

Never mind the current Congress – the real value of political futures markets like Intrade is their potential to put someone else out of business: pundits. Intrade&#8217-s predictions are erratic, unreliable, and meaningless – in other words, a perfect market in the conventional wisdom. Most Washington talking heads are just day traders in political gossip. Thanks to Intrade, you no longer have to listen to all the pontificators, because the market does it for you. In politics, it&#8217-s often hard to tell the difference between the conventional wisdom and &#8220-the wisdom of crowds.&#8221- One man&#8217-s CW is another man&#8217-s WC. As further proof that the market works, this wisdom is now available for free – which is exactly what it&#8217-s worth.

My Take: I agree with what I put in bold, but not with what&#8217-s in between and after.

Reality check on TradeSports-InTrades recent statement

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The spin doctoring goes like this:

TradeSports, the leading person to person retail trading exchange, continues to grow and innovate in the lead-up to this November&#8217-s US elections.

Reality Check: The world&#8217-s biggest retail, real-money prediction exchange is BetFair, actually.

TradeSports offers person to person trading services to thousands of registered members from all over the Globe who trade their opinions on hundreds of events such as the US November mid-term elections, the capture of Bin Laden, the Dow Jones at year end, and many sporting events.

Reality Check: TradeSports-InTrade is entirely dependend on its American clientele, which makes up for the bulk of its revenues.

We also provide prediction market data which is becoming the reporting standard on political and other future uncertainties to the world’s media, academia, investment businesses, state and political organizations.

Reality Check: Highly exaggerated, but true.

We will be launching a new “Express” trading interface in the coming weeks to further improve our service and to cement our position as the leading retail person to person trading exchange.

Reality Check: The world&#8217-s biggest retail, real-money prediction exchange is BetFair, actually. As for improving the service, besides the &#8220-Express&#8221- interface, I suggest to seek regulation from the Irish government and membership from the Independent Betting Arbitration Service. In contrast, BetFair is regulated in the U.K. and is a member of IBAS.

Recent and historical legal directives in the US and other countries have been aimed at organizations in the business of bookmaking, an activity in which TradeSports is not involved.

Reality Check: The real-money prediction exchanges are not exempted from the Internet Gambling Prohibition and Enforcement Act of 2006. Also, there&#8217-s no indication that the US Treasury and US DOJ will exclude the real-money prediction exchanges (a.k.a. betting exchanges) when they will enforce the law.

TradeSports is not a sportsbook or a bookmaker, and as an Irish Company, operating legally from Ireland, we will continue to provide our services to current and new registered members.

Reality Check: True. However, the problem will be how to make the money cross the Atlantic (from the U.S. clients to the Irish firm), now that Neteller is out of the US market.

Thanks to all our thousands of current and many new members, and those interested in our prediction market data for making TradeSports a phenomenon.

Reality Check: BetFair is a phenomenon, not TradeSports-InTrade, which a poorly managed company headed by some Irish people with no questionable ethics, who behaved like thugs badly during the NKM episode. [See David Pennock’s comment.]

Faulty polls screw up the political prediction markets.

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In today&#8217-s soapbox:

Yet it turns out that in 2002, IEM markets indicated that Republicans would lose the house. Which we now know is wrong. They were pretty consistent in their 2004 presidential prediction, however. I recall that Surowiecki discussed the fact that the predictive markets for congressional elections tended to be less accurate than the presidential ones&#8211-because fewer people got involved in the betting.

Wrong. Volumes are OK. If I remember well, the polls were wrong in 2002, so don&#8217-t look any further for the cause of failure of those IEM prediction markets.

Paper That Documents This 2002 IEM Debacle: Iowa Electronic Markets – (PDF) – by Paul Gomme – 2003-04-15

Until September, Republican control of the House was seen as a 50–50 proposition, while their control of the Senate received a probability of around 20 percent. In October, the likelihood of a Republican-controlled House fluctuated between 65 percent and 90 percent while the likelihood of a Republican Senate fluctuated around 40 percent. It was not until election day results came in that market participants locked in on the eventual outcome: Republican control of both the House and Senate. Of course, this outcome was generally a surprise: Neither pollsters nor political commentators called the Republican win in the Senate.

I Disagree With This Paragraph Of The Same Paper:

Better than Gallup? The IEM political markets have a couple of advantages over their closest “competitor,” the public opinion poll. One advantage is that data from the IEM are available virtually instantaneously and almost continuously. Results from polls are typically several days old when they are reported and are taken at discrete intervals. Consequently, data from the IEM are more amenable to studying events like the untimely death of a Senate candidate. A further advantage of the IEM is that contracts can be written based on intrinsically interesting events, such as who controls the House or Senate. Poll results require more massaging to answer such questions.

My Take: Give the polls a break, and quit saying that our predictive market-generated technology is a &#8220-competitor&#8221- to the polls. Without polls, the political prediction markets could return to the locker room. Plus, prediction markets aggregate probably [see comment] more than just the polls.

Hint: A public roasting of David Perry over his impersonating of George Gallup is in the tube and will be published soon on this blog.