But what about the “leaning” method? Well, it only makes sense if you believe that market prices do not represent probabilities. In fact, the “leaning” method treats the 15 electoral votes from a swing state like North Carolina (65% chance to go blue) the same way it treats the 15 votes from a true-blue state like New Jersey (95% chance to go blue), tossing them both equally in the Obama column.

Now, Intrade has been known to want it both ways: interpreting its prices as probabilities most of the time, but then also claiming that it correctly predicted all 50 states in 2004 because all the contracts priced over 50% eventually expired at 100%. This claim conveniently ignores the fact that if prices are probabilities, then at least some of the states priced “red” or “blue” over 50% should in fact have gone the other way on election day.

It may very well be that, given the 2004 data, the prices of election markets (on Intrade and elsewhere) should not be interpreted as probabilities. Perhaps our academic friends can come up with another meaningful way of looking at those prices. But in the meantime, assuming the price/probability correlation holds, the proper way to project the electoral vote count from the market prices is to run monte-carlo simulations based on individual state prices.

Here’s an example using this morning’s prices on NewsFutures. The histogram shows the results of 1 million simulated elections where each state goes red or blue according to its market-derived probability of doing so. Note how the “most likely” outcome, 364 votes for Obama – which is the number the “leaning” method would report – is at the same time very unlikely with just 5% chance of happening.

Check it out: http://vote08.newsfutures.com/vote08/index.html
It’s free, it’s fun, and you may actually win something

(If you are reading this in a feed and the widget doesn’t show up, just click here to view the movie directly on NewsFutures.)

By the way, you can copy this widget in your own blog or website by inserting this single line of code:

<script type=”text/javascript” src=”http://us.newsfutures.com/hcbo.html”></script>

It is designed primarily for business consultants who would like to acquire working knowledge of “WOC”-based solutions, or for the manager looking for some hands-on experience while considering the potential of this approach for his or her company.

The one-day program will cover:

• Foundations
  Prediction Markets and Wisdom of Crowds 101: principles, mechanisms, evidence, and applications
• Applications
  Case studies in strategy, forecasting, innovation, and project management
• Tools
  Hands-on experience with various wisdom-of-crowds software tools: Prediction Markets, Competitive Forecasting, Idea Pageant, and Impact Matrix
• Practice
  Keys to a successful implementation: information, integration, inclusion, interface, and incentives
• Collaboration
  Nuts and bolts of working with NewsFutures

If you are interested, please follow this link for more information about the venue and how to register.

I look forward to seeing you in NY, home of the world’s financial meltdown!

That’s an interesting reaction on several levels.

First, reactivity and accuracy are not to be confused for one another. Given that market prices are supposed to be more accurate and more stable that fickle U.S. raw polls (Berg et al, 2008), one should not necessarily be impressed by the market that is quickest to mirror the latest polls. I very much doubt that traders in the “other” markets have not heard about the latest polls giving McCain an edge. Rightly or wrongly – it is too soon to tell – they just gave those polls less weight that the Intrade traders apparently did.

Second, the argument from “bigger liquidity” is not receivable. Recently, Paul Tetlock analyzed Tradesports data in depth and found that more liquidity may in fact make the market dumber. He concludes: “In both sports and financial prediction markets, the calibration of prices to event probabilities does not improve with increases in liquidity; and the forecasting resolution of market prices actually worsens with increases in liquidity.”

My personal theory is that Intrade has a hair-trigger Republican bias which is not found in the other markets, because Intrade appeals to, and is marketed to, the more Republican-leaning segments of the U.S. population. In my opinion, the Intrade/Tradesports Republican bias was already evident in the 2004 election, as this analysis shows.

Of course, I may be completely wrong. In any case, I find today’s dual disconnect between the polls and most of the markets, on the one hand, and between Intrade and the other markets, on the other hand, to be two very interesting data points that should be duly recorded so we can come back to them later, with hindsight.

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However, just in time for Super Tuesday, I’ve finally stumbled onto a totally different, and to my mind much more compelling societal benefit of political prediction markets (the real-money kind, like Intrade or Bet2Give). It’s based on sound science, but has nothing to do with information, prediction accuracy, or the usual economics/decision-support suspects:

Participating in political prediction markets may be good for your health by virtue of reducing the killer stress caused by aggravating political outcomes over which you have very little control as a voter. In essence, you can hedge against despair, and thus reduce your political “learned helplessness”. I present this idea more completely, and the science behind it, in NewsFutures’ blog.

The interesting thing is that it should be relatively easy to test, say as a senior psychology research project, but the consequences of a positive result would be huge. Who could argue against the legalization of something that saves lives?

So let the word go forth on this day that if there’s someone out there who would like to run such an experiment, the industry would gladly help out, either through the PMIA, or through individual stake holders like NewsFutures. And if you’re in an economics department, please reach out across the social sciences aisle to your psychology colleagues and spread the word! This, by the way, is especially aimed at Justin Wolfers who happens to share the U. Penn campus with Martin Seligman, the founder of Positive Psychology himself, and the inventor of “learned helplessness”.

At the invitation of the organizers of the September 2007 DiamondExchange event, I will take part in a panel discussion on “technologies to raise your organization’s IQ” led by Chunka Mui, author of Unleashing the Killer App. The exclusive event features an outstanding list of speakers including Marvin Zonis, professor emeritus of the University of Chicago, Dan Bricklin, inventor of VisiCalc, Cory Ondrejka, who leads the team developing Second Life, and Ray Kurtzweil, who needs no introduction a all.

The event, titled “Enterprise 3.0: new representations, new markets”, is organized by the high-powered consulting firm Diamond (Nasdaq: DTPI). It’s nice to see that, having preceded the “Web 2.0″ bubble, prediction markets are already moving past it and being associated with the number 3…

The event will be held at the famous Greenbrier, in White Sulfur Springs, WV, whose tag line is “defining luxury since 1778″! Needless to say, I look forward to this fantastic opportunity to evangelize this particular crowd about the virtues of prediction markets.

–Emile (for NewsFutures)

[cross-posted from the NewsFutures blog]

Just like HP did with BRAIN, NewsFutures invented and refined those techniques over the years as simpler/better-fit alternatives to prediction markets for some enterprise problems and contexts. It’s no secret around here that most people don’t have an intuitive feel for “trading”, and that the busier they are (eg, senior execs), the less time and patience they have to learn anything new… Nowadays, we find that most companies we work for naturally choose to use one of these alternative mechanisms for gathering the wisdom of their crowd. These approaches fit the customer’s problem tightly so we don’t have to fit the customer’s problem to a generic prediction market approach.

Competitive forecasting is specialized for extracting range forecasts for business variables, like sales, prices, market share, etc, while Idea Pageants are designed especially for the task of quickly identifying the best new ideas in a very large pool. For instance, the NYT article mentions two of NewsFutures other clients: Arcelor Mittal is a long-time user of Competitive Forecasting, while InterContinental Hotels Group relies on an Idea Pageant to vet new ideas.

Importantly, both of these approaches stay true to what NewsFutures believes should be the two pillars of any reality-based knowledge aggregation mechanism: reward people for (a) being right, (b) before others.

We look forward to your questions and comments about these approaches, which you can now get your hands on at UC Riverside’s eLab eXchange.

[Cross-posted from the NewsFutures blog.]

However, through months and months of this media hype, prediction traders on NewsFutures and elsewhere remained skeptical. The price of the “President-Royal” contract only briefly caught up with Sarkozy’s just before the official campaign started, then collapsed.

The most interesting “prediction market moment” of the campaign happened just a few days before the final May 6 vote. On May 2nd, Royal and Sarkozy faced off in the first and only televised debate. By this time, Sarkozy was well in the lead, trading at 80% to Royal’s 20%, but any slip-up, any gaffe could have dramatic effects on the voting just four days later…

The candidates were facing each other. Royal, dressed to kill in black and white, never looked more righteous and “presidential”. When she wasn’t speaking, whe was staring down Sarkozy as if to project her implacable will upon the enemy of the people, a technique she had learned from her mentor, François Mitterrand (who had used it successfully against Jacques Chirac). Sarkozy responded by looking subdued, avoiding eye contact with his rival, slightly hunched like a scolded child; A far cry from the hot-tempered, conquering, Napoleonic character everyone had expected to witness. When Royal, in a fit of “righteous anger” accused him of being “immoral”, he kept his head down and barely responded.

After the debate, the pundits were all agreed that Royal had scored some points, and even die-hard Sarkozy fans openly worried that Royal had bested their champion. The next morning, newspapers and radio stations still conveyed the impression that Royal’s performance had probably helped her. However, the trading pattern one could observe on NewsFutures and other prediction markets told a different story altogether. The price of Sarkozy’s contract actually rose a little during the debate and just after, as evidenced in the chart at left. The next morning, this gain held, even as political pundits on the radio stations were still praising Royal’s performance. The disconnect continued until the afternoon, when the results of a poll taken just after the debate showed that it was Sarkozy that had come out on top, confirming the market’s impression.

So, once again, prediction markets performed quite well in an electoral context. This, of course, won’t come as a big surprise to anyone familiar with the field.

Perhaps the more interesting observation in this case is that Ségolène Royal had embraced a “participative” campaign style that very much drew on the “widsom of the crowds”. Her campaign rallies were organised as bottom-up “listening” events designed to extract themes and practical solutions directly from the people themselves. She would ceaselessly repeat that “people are the best experts of what they are living through”. When pressed to give her opinion on a controversial issue, she would often reply that, as President, rather than imposing her views from the top down, she would invite all concerned parties to debate and come up with a proper solution. It is ironic that, in the end, the crowd itself preferred to trust the more authoritarian, decisive, top-down candidate. There is a lesson here about democracy: The crowd demands to be able to choose its leaders, regularly, but then it expects them to lead, not follow.

–
Cross-posted from NewsFutures’ blog (deep link).