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Prediction markets are just an information aggregation mechanism (and also a collective anticipation mechanism), which highly depends on what the experts on the ground can discover. Prediction markets are not a magical tool. Event derivative traders are like bees; they harvest information and the expert consensus out there. Prediction markets cannot be a substitute for the credit rating agencies —that’s the biggest stupidity I have ever heard in my life. (How come a CEO can state such a crétinery, and how come Jason Ruspini can endorse indirectly such an imbécility.)

If the InTrade prediction markets had been so useful during the recent (and on-going) credit crisis and stock market crisis, then the Wall Street Journal and CNBC would have immediately reported on their magical prowess. These media didn’t put InTrade on the spotlight during the recent crises for a simple reason: the InTrade prediction markets have a low social utility at this time. It’s just a tool of convenience for people who don’t want to bother looking into the various polls. InTrade cuts time for the busy people. InTrade is like a shortcut. It is somewhat useful if you are busy, but you can live well without it if you are not. (Do read the very last line of this interview.)

Can InTrade be a substitute for the credit rating agencies? Even asking the question is preposterous. I disagree strongly with InTrade CEO John Delaney (“Prediction Markets Have a Big Role to Play“). In my view, it is wrong to overvalue the real social utility of the prediction markets. We should not lie. We should not over-sell. We should tell the truth. We should call bullshit on John Delaney’s grandiose statements.

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To the question asked in the title of this post, some have answered by the affirmative (“Prediction Markets Have a Big Role to Play”). In my view, it is wrong to overvalue the real social utility of the prediction markets.

As of today, we can plainly see 2 things. Number one, the prediction markets are a tool of curiosity. People have heard about InTrade thanks to numerous news articles (where some prediction market researchers who get the InTrade historical data for free pump up the prediction markets as God’s right arm on Earth). At crunch time, the people teased by all this publicity flock to the InTrade website to satisfy their curiosity about the state of the horse race. Number two, a subset of the general population (made up of educated people who believe in the virtues of markets) use the prediction markets as a tool of convenience. Instead of spending long hours reading the various outputs by the pollsters and the commentariat, these people just check InTrade on a daily basis, because they know that it is primarily (but not only) an information aggregation mechanism. InTrade sums up the news of the day, so to speak. Hence, these people (in the know about how to benefit practically from the wisdom of crowds) don’t have to spend time gathering and analyzing the news of the day.

To the question asked in the title of this post, I’ll answer “no” —unless one of my readers can educate me more about the following issues:

1. Did InTrade set up a set of prediction markets, in the summer of 2008, aiming at forecasting the (then) “upcoming financial crisis”? I am afraid that the answer is “no”.
2. Did the World Economic Forum (a.k.a. Davos) manage to open the eyes of the 2,500 so-called “global leaders” (a grandiose denomination that includes many of the Wall Street CEOs, and, yes, some financial bloggers like Felix Salmon, invited to that Swiss annual grand Mess of the capitalism) about the financial instability that was already perceptible in the recent years? I am afraid that the answer is “no”. Now, ask yourself: If Davos can’t, what makes John Delaney think that he can?
   
3. Is there out there at least one expert (by “expert” I mean any professional other than the so-called prediction market experts who are expert in nothing else than pumping up the prediction markets) who can demonstrate clearly that the prediction markets in his/her vertical have helped tremendously in his/her pursuit of creating long standing wealth? I am afraid that the answer is “no”.
4. How come nobody called bullshit on InTrade CEO’s grandiose statement?
5. How come Jason Ruspini, usually so critical, has become as servile as a poodle?
6. Is Robin Hason the only adult in the field of prediction markets?

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I Told You So.

by Ed Miracle

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