I told you that vice presidential search committees and VP prediction markets are complete bullshit, didnt I?

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The McLaughlin Group of mid-June (yes, I know, that&#8217-s last month):

MS. BERNARD: Well, here&#8217-s what I think. I think the dirty little secret is Barack Obama probably already knows who he&#8217-s going to select to be his vice presidential running mate. You put out the search committee, probably because Hillary Clinton was all over his back last week &#8211-

DR. MCLAUGHLIN: So this is a smokescreen. This is a smokescreen.

MS. BERNARD: I don&#8217-t know if it&#8217-s a smokescreen, but I think he has a good idea who his vice presidential running mate is going to be. And the search committee is much ado about nothing.

I told you so.

No good advanced, primary indicators.

Don&#8217-t trade on VP prediction markets.

2 days after my ringing the alarm bell… THE FREE FALL

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– My first warning: June 4. + My second warning: June 4, later that day. + My third warning: June 5.

– Now, spot the timeline in the event derivative chart below.

Take that, Mike R. :-D

TAKEAWAY: If you are a UK-based or British trader on prediction markets, don&#8217-t believe a single word of what UK-based or British bloggers say about US politics. Go to US-based or American blogs to get the information you need to inform your US bets.

If you followed that British blogger, you&#8217-d be in the red today.

Get your information from sources close to the action &#8212-not one ocean away.

Get your information from vibrant sources who use intelligently both the information technology and the wisdom of crowds to comprehend the news &#8212-see my point #5 on yesterday&#8217-s post.

Pay attention to what I&#8217-m going to say in the coming weeks about &#8220-prediction market journalism&#8220-. Thanks.

WEB EXCLUSIVE: – The annoted, historical, compound chart that those triple morons at the BetFair blog are hiding from their readers view. – It is located in a secret cache, linked to behind a picture of Hillary Clinton. – Curious place to locate a prediction market chart. – I bet nobody downloaded t

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For comparison, InTrade:

Dont trade on the VP predictions markets. – Dont bet on Hillary Clinton as VP. – Dont listen to betting bloggers who tell you that Hillary Clinton has a chance to be on the Democratic ticket. – Dont believe in vice presidential selection committees. – Select well your primary, advanced indicators. –

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The topic of this post is:

Betting &amp- Information

#1. Don&#8217-t trade on the VP predictions markets.

I have stong reservations about those VP prediction markets. Only 2 men in the world know what is going to happen: Barack Obama, and John McCain.

You can&#8217-t divine their final thoughts.

Politicians often lie about their intentions &#8212-they also change mind, frequently.

The decision to name one VP nominee could be made in secret &#8212-without any early warnings.

Surprise is a card that Barack Obama and John McCain could play. Don&#8217-t bet against their final will.

#2. Don&#8217-t believe in &#8220-vice presidential selection committees&#8221-.

Last time, in 2000, a man named Dick Cheney was appointed to head George W. Bush&#8217-s vice presidential selection committee.

He was supposed to scout around to find and assess good candidates.

Surprise, surprise, that fake committee ended up putting Dick Cheney on the Republican ticket &#8212-and the rest is history (Iraq war, etc.).

#3. Don&#8217-t bet on Hillary Clinton as VP.

She does not have the slightest chance.

It&#8217-s highly unlikely that Barack Obama selects her on the Democratic ticket.

Hillary Clinton as VP nominee (and as VP) would present many quasi insurmountable problems.

#4. Don&#8217-t listen to betting bloggers who tell you that Hillary Clinton has a chance to be on the Democratic ticket.

They are clueless.

Don&#8217-t read clueless people. They are a waste of time.

#5. Select well your primary, advanced indicators.

  1. Go to the sources of information. Discard filters. Your insatiable curiosity should drive your search for information.
  2. Use technology to select the best news articles out there. Bookmark Memeorandum for US politics (and TechMeme for information technology) &#8212-they use bloggers&#8217- links to select what&#8217-s hot, a bit like Google&#8217-s PageRank does.
  3. Use the crowd to sense what&#8217-s hot or to discover marginally interesting tidbits. I have 56 friends on Google Reader who share their best items with me. I got many interesting stories that way, every day, from sources I would have never known about, otherwise. (Plus, I receive many e-mails each day from potential sources.)

#6. Choose your bets (and trades) carefully.

Just because an event derivative is cheap doesn&#8217-t mean that it&#8217-s a good bet.

Don&#8217-t pluck down money on a bet unless you&#8217-ve seriously researched the topic by yourself &#8212-and possesses some expertise or experience in that field.

FOLLOW-UP POST: 2 days after my ringing the alarm bell… THE FREE FALL

InTrade

Democratic Vice President Nominee

Price for 2008 Democratic Vice-Presidential Nominee at intrade.com

Price for 2008 Democratic Vice-Presidential Nominee at intrade.com

Price for 2008 Democratic Vice-Presidential Nominee at intrade.com

Price for 2008 Democratic Vice-Presidential Nominee at intrade.com

Republican Vice President Nominee

Price for 2008 Republican Vice-Presidential Nominee at intrade.com

Price for 2008 Republican Vice-Presidential Nominee at intrade.com

Price for 2008 Republican Vice-Presidential Nominee at intrade.com

Price for 2008 Republican Vice-Presidential Nominee at intrade.com

BetFair

Next Vice President:

Democratic Ticket

Democratic Vice President Nominee

Republican Vice President Nominee

NewsFutures

Barack Obama will pick a woman as running mate.

© NewsFutures


Explainer On Prediction Markets

Prediction markets produce dynamic, objective probabilistic predictions on the outcomes of future events by aggregating disparate pieces of information that traders bring when they agree on prices. Prediction markets are meta forecasting tools that feed on the advanced indicators (i.e., the primary sources of information). Garbage in, garbage out&#8230- Intelligence in, intelligence out&#8230-

A prediction market is a market for a contract that yields payments based on the outcome of a partially uncertain future event, such as an election. A contract pays $100 only if candidate X wins the election, and $0 otherwise. When the market price of an X contract is $60, the prediction market believes that candidate X has a 60% chance of winning the election. The price of this event derivative can be interpreted as the objective probability of the future outcome (i.e., its most statistically accurate forecast). A 60% probability means that, in a series of events each with a 60% probability, then 6 times out of 10, the favored outcome will occur- and 4 times out of 10, the unfavored outcome will occur.

Each prediction exchange organizes its own set of real-money and/or play-money markets, using either a CDA or a MSR mechanism.

JASON RUSPINIS CROCKERY: The Brain states forcefully that they are not event futures, but binary options. Still, as soon as he premieres prediction markets on tax rates at InTrade, he calls them tax futures -of course.

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Measured Enthusiasm for Prediction Markets – (PDF file) – by Jason Ruspini.

My thoughts:

  1. Peter McCluskey thinks they are &#8220-futures&#8221-.
  2. PAM was only extremely marginally about &#8220-terrorism and assassination futures&#8221-.
  3. Even though they don&#8217-t do much more than discounting known information, &#8220-prediction markets&#8221- is not a misnomer, since the term means that each prediction (in the form of an event derivative contract) is traded on a market.
  4. &#8220-Decision-aid markets&#8221-, not &#8220-decision markets&#8221- &#8212-I&#8217-d leave that last denomination for Robin Hanson&#8217-s original idea, when the decision applies automatically, after the trading.
  5. And what was Justin Wolfers&#8217- reasoning? Might we know? (And why did you swallow it?)
  6. Which are the manipulation papers making &#8220-unrealistic assumptions&#8221-? Names, please.
  7. Tax futures are great. But, who else in the world, other than mister Ruspini, believes that they can be fiscal hedging vehicles? (Not doubtful. Just asking. External links, please.)

Jason Ruspini on the regulation of US event derivative markets:

CFTC-like regulation would save these markets from having to navigate national and state gambling laws, but would come at the cost of flexibility. Some contracts would not be approved for political reasons even if they had demonstrable hedging utility and “economic purpose”.

CFTC regulation and election contracts

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Insofar as event markets are within the CFTC&#8217-s jurisdiction, they would likely be approved as &#8220-excluded commodities&#8221-. Here is the relevant part of the definition within the Commodity Exchange Act:

(iv) an occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or level of a commodity not described in clause (i))
that is—
(I) beyond the control of the parties to the relevant contract, agreement, or transaction- and
(II) associated with a financial, commercial, or economic consequence.

With the putative terrorism and assassination markets, by their nature, it is impossible to reliably identify who might manipulate an outcome. It could be argued then that such contracts do not involve commodities and lie outside the jurisdiction of the CFTC.* The counterargument is that such markets are actually &#8220-exempt commodities&#8221-, defined broadly in the CEA as &#8220-all non-agricultural, non-excluded commodities&#8221-. This is something for the CFTC to clarify: are event markets &#8220-excluded commodities&#8221-, &#8220-exempt commodities&#8221-, or might they fall into either category depending on their specifics? Examples of exempt commodities are energy products, metals and quasi-currencies like energy, bandwidth and carbon credits. In practice then, if not by law, exempt commodities have involved something deliverable in units other than cash, although specific contracts might also be cash-settled.

It is a good bet then that the CFTC would classify event markets as excluded commodities. Additionally, invoking the &#8220-beyond the control&#8221- clause would be a very antiseptic way for the agency to repudiate markets based on terrorist events and the like, although they would risk losing the ability to punish similar markets that do not meet all criteria. Putting that issue aside for a moment and considering only the CFTC&#8217-s approval process, this treatment would bring up two problems with markets that the agency might want to regulate. Each of these problems has a solution.

First, wouldn&#8217-t election and policy markets also be disqualified by the clause? After all, a candidate could throw an election for profit, or perhaps more likely, engage in some sort of &#8220-point shaving&#8221-. Remember, these are not securities and thus not subject to insider-trading laws. The CEA, however, includes a section 13(f) prohibiting members of exchanges from trading on material nonpublic information obtained through their exchange duties. It is feasible to create similar trading restrictions at the regulatory level, by disallowing candidates, their staffs and proxies from trading.

Such trading prohibitions would reasonably ensure that no trader would be in control of the outcome of the contract. The CFTC could levy a special trading fee (much less than 1% notional) on such contracts to offset the relative work they might entail. The framework for such an arrangement could possibly be clarified on the CFTC&#8217-s next reauthorization. In a sense, it was unfortunate that their request for comments on event markets came so late in their recent reauthorization process. From another perspective, they ostensibly have until 2013 to exercise innovative, progressive policy.

Now, what if someone not barred from trading possesses damning information, photos, etc, on a candidate? By deciding whether or not to release that information, are they then &#8220-in control&#8221- of the contract&#8217-s outcome? It&#8217-s doubtful. Even though they might influence the contract&#8217-s outcome, they are not &#8220-in control&#8221- of it. The situation is similar to whether or not a trader, who might be aware of a new oil find or simply has a large account, is in control of that non-&#8221-excluded&#8221- commodity price. In general, the rules should be designed to elicit as much information as possible, falling short of allowing traders to decide a 0 or 100 settlement.

The second issue is the implicit assassination option in candidates&#8217- contract prices.** This issue could be easily dealt with, as Intrade does with their updated rules. Clearly this would be necessary with CFTC-regulated contracts, or else an unknown might be in control of their outcomes. The CFTC rule might work as follows. Upon a death, all contracts would be immediately cash-settled at their last price before the event. As soon as possible, an updated set of contracts would then begin trading so that no trader is able to profit or lose from the jump in prices. This process would be similar to traders simply rolling into a new contract maturity. It would be disruptive, but nothing to complain about compared to the tragedy of the situation. Small modifications to the rule could address scenarios where a candidate is incapacitated for some time during which their candidacy is uncertain.

A more challenging scenario is the possibility of a manipulation preceding the event such that the forced settlement locks-in profits, presumably just as market power is exhausted. Regulations could provide for an investigation of such situations, and the relevant transactions and profits shouldn&#8217-t be too hard to find with that level of scrutiny.

This framework addresses several of the questions posed in the CFTC&#8217-s concept release. That document and comments elsewhere seem to indicate a reluctance to expand jurisdiction to the point where sports markets and gaming might be included. Officials now and then harken back to the pre-CFMA economic purpose test, but that test could be effectively reconstituted for event markets with a policy decision such that those markets will only be approved as excluded commodities, subject to their specific &#8220-economic consequence&#8221- clause. In itself, that policy would not impinge on the agency&#8217-s ability to prosecute unauthorized exchanges in similar markets (and hopefully they will treat Intrade with some degree of amnesty given the ambiguous and arbitrary law of this country). While this policy would leave the door open even for regulated sports-based hedging markets, the CFTC could leave the prosecution of online sports and gaming exchanges to the DOJ and state authorities for now. The burden of the duty to prosecute illegally operating exchanges might be smaller than feared, and, again, the agency could levy a special fee on such regulated markets to offset demands on its resources.

These opinions perhaps pose more questions than they answer. The Commodity Exchange Act is broad enough to encompass jurisdiction over event markets. The CFTC seems unsettled that the language is too broad, but there are ways for them to calibrate their jurisdiction at the policy level.

* A market in research science claims would follow the same logic in terms of jurisdiction. Even without a no-action letter or public interest exemption, the chances seem very good that such an exchange could operate without interference if they stayed with small claims, did not advertise and did not accept trades from States where the predominant factor test does not apply.

** Let me condemn Hillary Clinton&#8217-s recent remarks as sinister and irresponsible.

Cross-Posted from RM&amp-P

Who will be the next US Vice President, past January 2009?

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UPDATE:

To be kept updated on the prediction markets, go to the frontpage of Midas Oracle, or click on the InTrade tag.

Here are the expired contracts about the Democratic vice presidential nominee (Joe Biden).

Here is the expired contract about the Repuiblican vice presidential nominee (Sarah Palin).

ORIGINAL POST:

Unlike Bo Cowgill, I have stong reservations about those VP prediction markets. Read this WSJ post, for more.

InTrade

Democratic Vice President Nominee

Price for 2008 Democratic Vice-Presidential Nominee (with Field contract)(expired at convention) at intrade.com

Price for 2008 Democratic Vice-Presidential Nominee at intrade.com

Price for 2008 Democratic Vice-Presidential Nominee at intrade.com

Price for 2008 Democratic Vice-Presidential Nominee at intrade.com

Price for 2008 Democratic Vice-Presidential Nominee at intrade.com

Republican Vice President Nominee

Price for 2008 Republican VP Nominee (others upon request)(expired at convention) at intrade.com

Price for 2008 Republican Vice-Presidential Nominee at intrade.com

Price for 2008 Republican Vice-Presidential Nominee at intrade.com

Price for 2008 Republican Vice-Presidential Nominee at intrade.com

Price for 2008 Republican Vice-Presidential Nominee at intrade.com

BetFair

Next Vice President:

Democratic Vice President Nominee

Republican Vice President Nominee

NewsFutures

Barack Obama will pick a woman as running mate.

© NewsFutures


Explainer On Prediction Markets

Prediction markets produce dynamic, objective probabilistic predictions on the outcomes of future events by aggregating disparate pieces of information that traders bring when they agree on prices. Prediction markets are meta forecasting tools that feed on the advanced indicators (i.e., the primary sources of information). Garbage in, garbage out&#8230- Intelligence in, intelligence out&#8230-

A prediction market is a market for a contract that yields payments based on the outcome of a partially uncertain future event, such as an election. A contract pays $100 only if candidate X wins the election, and $0 otherwise. When the market price of an X contract is $60, the prediction market believes that candidate X has a 60% chance of winning the election. The price of this event derivative can be interpreted as the objective probability of the future outcome (i.e., its most statistically accurate forecast). A 60% probability means that, in a series of events each with a 60% probability, then 6 times out of 10, the favored outcome will occur- and 4 times out of 10, the unfavored outcome will occur.

Each prediction exchange organizes its own set of real-money and/or play-money markets, using either a CDA or a MSR mechanism.

Robust, the prediction markets are the best mechanism for aggregating information. Thus, companies should use them for assessing strategy and hedging risks.

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Via Emile Servan-Schreiber of NewsFutures, John Auters in the Financial Times.

[…] This leads to [Justin Wolfers]&#8216- claim that [prediction markets] are the best way to aggregate information. This is true of any given amount of information. Take three economists and make them trade out a market over their predictions for next month&#8217-s inflation number, he suggests, and they will arrive at a more accurate prediction than a poll of the same three economists. In a market, those with stronger conviction (or inside information) can express that conviction- those less confident will not be willing to stake money. […]

Prediction markets remain subject to the same weaknesses as other markets. The principle of &#8220-garbage in, garbage out&#8221- [*] applies. If there is only poor information to aggregate, they will be as wrong as everyone else. […]

It would make sense to incorporate these odds when making investments. […]

Excellent.

(I don&#8217-t get his micro slam against the wisdom of crowds. Anyway.)

[*] As explained in the prediction market explainer published on the frontpage of Midas Oracle.

ABC 20/20 – A good (but servile) explainer on the wisdom of crowds and the prediction markets

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ABC 20/20 featuring InTrade – (May 9, 2008)

Foretelling The Future: Online Prediction Markets &#8212- (4 pages in all)

ABC video

YouTube video

  1. Not a single word about InTrade-TradeSports fucking up its traders during the North Korea Missile episode.
  2. Although James Surowiecki is a great thinker overall, I&#8217-m not happy he served InTrade&#8217-s past forecasting successes in absolute terms &#8212-and not in terms of probabilities. That shows James Surowiecki can&#8217-t be the ultimate leader of the field of prediction markets. Robin Hanson, Justin Wolfers, Koleman Strumpf, Eric Zitzewitz, or even Emile Servan-Schreiber, would have not made that mistake.
  3. All prediction markets are not created equal. Spot that they go too far, saying terrorism prediction markets or earthquake prediction markets could serve a societal purpose. That is complete bullshit. That is pure hype. As I said yesterday, an analyst should check whether a given prediction market is really able of aggregating important information. Just because John Delaney wants to create a betting market to get money doesn&#8217-t mean that that given prediction market will be able to give sound forecasts. Otherwise, we would have prediction markets about future lottery outcomes and we would make a fortune out of that. :-D
  4. Spot that they put the emphasis on the easy translation between the 0&#8211-100 prices and the 0&#8211-100 probabilities. That puts BetFair&#8217-s model (based on those damn digital/decimal odds) out of the picture.

STRAIGHT FROM OUR U-TURN DEPARTMENT: Here are the VP prediction markets -all of them.

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Don&#8217-t you love the Web? Within 15 minutes after my posting my absolute and definitive refusal to publish any bits about the VP prediction markets, I received a long rebuttal by Google&#8217-s Bo Cowgill &#8212-whose great prediction market paper is still for you to download (PDF file), by the way.

Okay, Okay, Okay.


InTrade

Democratic Vice President Nominee

Price for 2008 Democratic Vice-Presidential Nominee at intrade.com

Price for 2008 Democratic Vice-Presidential Nominee at intrade.com

Price for 2008 Democratic Vice-Presidential Nominee at intrade.com

Price for 2008 Democratic Vice-Presidential Nominee at intrade.com

Republican Vice President Nominee

Price for 2008 Republican Vice-Presidential Nominee at intrade.com

Price for 2008 Republican Vice-Presidential Nominee at intrade.com

Price for 2008 Republican Vice-Presidential Nominee at intrade.com

Price for 2008 Republican Vice-Presidential Nominee at intrade.com

BetFair

Next Vice President:

Democratic Vice President Nominee

Republican Vice President Nominee

NewsFutures

Barack Obama will pick a woman as running mate.

© NewsFutures


Explainer On Prediction Markets

Prediction markets produce dynamic, objective probabilistic predictions on the outcomes of future events by aggregating disparate pieces of information that traders bring when they agree on prices. Prediction markets are meta forecasting tools that feed on the advanced indicators (i.e., the primary sources of information). Garbage in, garbage out&#8230- Intelligence in, intelligence out&#8230-

A prediction market is a market for a contract that yields payments based on the outcome of a partially uncertain future event, such as an election. A contract pays $100 only if candidate X wins the election, and $0 otherwise. When the market price of an X contract is $60, the prediction market believes that candidate X has a 60% chance of winning the election. The price of this event derivative can be interpreted as the objective probability of the future outcome (i.e., its most statistically accurate forecast). A 60% probability means that, in a series of events each with a 60% probability, then 6 times out of 10, the favored outcome will occur- and 4 times out of 10, the unfavored outcome will occur.

Each prediction exchange organizes its own set of real-money and/or play-money markets, using either a CDA or a MSR mechanism.