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New Hampshire – The Democrats

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The Hillary Clinton event derivative was expired to 100.

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New Hampshire – The Republicans

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The John McCain event derivative was expired to 100.

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“a handful of methodological missteps and miscalculations combined to undermine the accuracy of predictions about presidential primary winners in New Hampshire and three other states.”

Via Mister the Great Research Scientist David Pennock –who is an indispensable element of the field of prediction markets.

As I blogged many times, prediction markets react to polls… See the addendum below… – [UPDATE: See also Jed's comment.] – Prediction markets should not be hyped as crystal balls, but simply as an objective and continuous way to aggregate expectations. So, if you think of it, their social utility is much smaller than what the advocates of the “idea futures”, “wisdom of crowds” or “collective intelligence” concepts told us. Much, much, much, much smaller… They all make the mistake to put accuracy forward. (By the way, somewhat related to that issue, please go reading the dialog between Robin Hanson and Emile Servan-Schreiber.)

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Addendum

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California Institute of Technology economist Charles Plott:

What you’re doing is collecting bits and pieces of information and aggregating it so we can watch it and understand what people know. People picked this up and called it the “wisdom of crowds” and other things, but a lot of that is just hype.

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New Hampshire – The Democrats

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The Hillary Clinton event derivative was expired to 100.

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New Hampshire – The Republicans

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The John McCain event derivative was expired to 100.

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Nate Silver on November 3rd, 2008:

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Nate Silver on August 21, 2008:

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- Transaction fees (you would need to operate on 2 exchanges);

- Currency risks and cost for hedging on that.

Eric Crampton (a Canadian exiled in New Zealand) says he has managed to turn a buck, though, by arbitraging between InTrade and iPredict New Zealand. He also makes 2 theoretical points. Go read it.

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#1. Is InTrade being manipulated?

- Nate Silver shows that there are abrupt downward pressures on the Barack Obama event derivative, while we also see some abrupt upward pressures on the Hillary Clinton event derivative.

However, you can see by yourself that InTrade is resilient enough and does a great job of going back to normal [*], after just a few hours of trading:

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- At Portfolio, blogger Zubin Jelveh blows the incidents out of proportion.

- Professor Lance Fortnow has a more careful analysis and notes that the price of the Barack Obama bounces back quickly enough.

- Quick thought: Maybe the media should use an average of event derivate prices for the last 5 work days… so that the abrupt perturbations would be eliminated.

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[*] UPDATE:

Professor Eric Zitzewitz:

I’m not sure you can conclude from Silver’s graphs that the market goes “back to normal.” You can conclude that it moves back in the opposite direction of the impact those large trades. Back when the Hillary for President market looked like it was being manipulated, it appeared that the manipulator was both placing a large purchase and then placing limit orders to provide price support and slow down the reversion of the price.

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UPDATE: Are we witnessing manipulation attempts on the “Florida to vote Republican” prediction market at InTrade?

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#2. Why does InTrade give a discounted probability for Barack Obama as US president?

- As you remember, Emile Servan-Schreiber of NewsFutures believes that it’s a Republican conspiracy all over.

- Professor Justin Wolfers puts up an hypothesis: it’s legally impossible for US traders to arbitrage on BetFair.

- InTrade put up a crappy excuse: the industry is still too “young”. How lame. How stupid. The industry was younger in the previous elections, where arbitrage opportunities didn’t exist according to professors Justin Wolfers and Eric Zitzewitz (see their 2004 paper and their other publications).

- Blogger Zubin Jelveh swallows the InTrade P.R. line, and adds another crappy InTrade P.R. line: More arbitrage opportunities are being exposed in open air because much more observers are hunting down arbitrage opportunities in 2008 than in previous elections. That’s a second blatant cretinery, uncorrected by the Portfolio blogger. Re-read Justin Wolfers’ blog post. Professor Justin Wolfers states that:

The current variation in price is larger than I have ever seen in my years of studying prediction markets. The forces of arbitrage that would typically eliminate these differences have been handicapped by the legal restrictions preventing U.S.-based traders from using overseas markets.

- Finally, professor Lance Fortnow says nothing about the arbitrage opportunities between InTrade and BetFair, but does offer some technical points about the issue of polls versus the prediction markets, centered around the question of state correlations. Read on.

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UPDATE: Eric Crampton (a Canadian exiled in New Zealand) says he has managed to turn a buck by arbitraging between InTrade and iPredict New Zealand. He also makes 2 theoretical points. Go read it.

UPDATE: Greg Mankiw just linked to Nate Silver.

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In addition to title, the reverse is true of OBAMA/DEM.

Do traders really think there’s some probability of McCain being elected as an idependent and Obama being replaced as the Democrat nominee?

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UPDATE: He took the bait…

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MS. BERNARD: Well, here’s what I think. I think the dirty little secret is Barack Obama probably already knows who he’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 –

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

MS. BERNARD: I don’t know if it’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.

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I told you so.

No good advanced, primary indicators.

Don’t trade on VP prediction markets.

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InTrade

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Democratic Vice President Nominee

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Republican Vice President Nominee

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BetFair

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Next Vice President:

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Democratic Ticket

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Democratic Vice President Nominee

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Republican Vice President Nominee

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NewsFutures

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Barack Obama will pick a woman as running mate.

© NewsFutures

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Explainer On Prediction Markets

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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… Intelligence in, intelligence out…

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.

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