But Koleman Strumpf isn’t so sure that this is manipulation. Koleman’s main evidence is that the law of one price appears to (roughly) hold across markets, and so the 2008.PRES.CLINTON security is similarly priced on BetFair, and elsewhere. Of course, this isn’t evidence against manipulation, but it is interesting. He raised the real possibility that this is a rational market response to some recent developments, although for the life of me, I can’t figure out what development that may be.

At the heart of Koleman’s concern is a question about the burden of proof here. And I have some sympathy for the view that when a market price moves in a direction you don’t expect, one should change one’s expectations, not one’s view of prediction markets.

So here is a simple way to resolve the issue of the burden of proof… If the current market price is a reflection of available information, then as future information comes in, it is as likely to rise as to fall. So I want to offer Koleman the following bet: If the price of 2008.PRES.CLINTON is higher than 38 (the current price on Intrade) on June 30, then I’ll buy him his favorite cigars. And if it is lower, I’ll be waiting for a good bottle of Aussie red.

Of course, we would want to make sure that this friendly wager is, itself, manipulation-proof. So I’ll suggest we use the volume-weighted average trading price on June 30 to resolve the bet, and not simply the last 11:59pm trade.

So Koleman, do we have a bet?

And more generally, do we have a useful mechanism for resolving scientific disputes?

[Cross-posted from overcomingbias.com]

I started studying this market over a year ago now, and in a research paper with Refet Gurkaynak, we compared the forecasting performance of the markets, with the median from the usual consensus surveys run by Bloomberg or MMS. While the markets are still young (and hence our conclusions somewhat tentative) our research suggests that the market does a better job in forecasting both actual outcomes, and subsequent bond market responses.

Somewhat surprisingly, about a year later, the press are finally picking up on this story. Look to see a few stories hit the wires this week. Indeed, I did a spot on TV this morning. A copy of the Bloomberg spot is online here. (Warning: Large file.) At best, this is one of the few times you will see me in a tie.

For those more interested in the actual research, our original research paper, recently published in the NBER International Seminar of Economics volume, is available here.

I also wrote a more digestible (that is, four page) version for the San Francisco Fed, available here. The NBER have also posted a useful summary of the paper, in the NBER Digest here .

The nice thing about this particular setting is that it really involves a very well-defined comparison between two alternative information aggregators: markets, and averages of expert opinion. And not surprisingly perhaps, the market comes out ahead. Equally, there is some good news for those economists who have used surveys as indicators of economic expectations: they seem to do a pretty good job, too.

Justin Wolfers

Looking at stockmarket reactions, it seems pretty serious.

From today’s Guardian:

The online gaming industry’s bet that American legislators would never get around to outlawing internet games such as poker went spectacularly wrong yesterday. An estimated £4bn was wiped off the sector’s value as share prices crashed after a weekend ambush by Washington.

Full story: http://www.guardian.co.uk/frontpage/story/0,,1886369,00.html.

I have already heard of at least one major bookmaker – Australian-based Centrebet (www.centrebet.com.au) – already closing the accounts of US-based clients.

While these early stock-market reactions look pretty serious, my guess is that these sorts of laws tilt the competitive landscape away from the larger more legitimate operations (like those public companies based in London), and toward the smaller (and more legally “agile”) firms operating in a less transparent manner. So perhaps this stockmarket reaction somewhat overstates the impact.

Stay tuned for more… (Hat tip: Paul Tetlock and Sam Savage.)