Summary of the Tradesports DEMS.HOUSE.OVER29.5 issue, and the TS credibility gap

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In the past weeks, there was something of a dust-up over TS&#8217- handling of the DEMS.HOUSE.OVER29.5 contract. According to all American media, the Democrats needed 15 new House seats to gain control of the House of Representatives. And, indeed, in the final days leading up to the election, there an excellent synchronization between the DEMS.HOUSE.OVER14.5 contract and the inverse of HOUSE.GOP.2006, indicating a perceived equivalence between 100 – p(HOUSE.GOP.2006) and DEMS.HOUSE.OVER14.5. Thus, the (presumably overwhelmingly American) market inferred that TS would follow the same convention as all American media, mainstream and otherwise, did. And according to American media, a Democrat replacing independent Socialist Bernie Sanders didn&#8217-t count as a Democratic pickup, because he already caucused with the Democrats anyway. However, TS initially disagreed with that, and counted Sanders as a non-Democrat. (More on that soon.)

Speaking personally, TS reinforced this perception&#8211-that independents who caucused with the Democrats counted as Democratic seats, and if they were replaced by an official Democrat, that wouldn&#8217-t increase the Democrats&#8217- vote total&#8211-by specifically stating, in regards to SENATE.GOP.2006, that a &#8220-loss&#8221- of the Connecticut seat to Joe Lieberman (who had switched from Democrat to Independent) would still be counted as a Democratic seat, because Lieberman already caucused with the Democrats anyway.

The fine print of the Tradesports DEMS.HOUSE.OVERXX contracts was, for most of the time, fairly clear in stating that the Democrats started from 201 seats, and anything over that number would constitute a gain. Judging from the activity of DEMS.HOUSE.OVER14.5, however, I believe that most of the market inferred (as did I) that 201 was the initial starting number of of Democrat seats according to American convention as well as TS, and didn&#8217-t realize the difference between the two systems. A very technical mistake, but not one for which TS deserved blame.

However, TS threw a monkey wrench in the system by telling forummer &#8220-gekko6&#8243- that Bernie Sanders&#8217- Independent seat going Democratic would not count as a Democratic pickup, because Sanders had already caucused with the Democrats in the first place. In this decision, as in its Connecticut Senate decision, TS showed an impressive grasp of the vagaries of the American political system&#8211-namely, that the size of each caucus was the real issue- and Congressional majorities being determined on the basis of caucus, not party affiliation, it only made sense to calculate the shift in power in the House on the same basis.

Unfortunately, that also meant that TS had, at the same time, repudiated its own convention for what constituted a &#8220-gain.&#8221- &#8220-gekko6&#8243- had already been very aware of this issue, because he had pointed out that the actual starting count according to the American system was 203, not 201&#8211-due to Sanders&#8217- being an independent endorsed and unopposed by the Democrats, and the vacancy of Bob Menendez&#8217-s seat after Menendez was appointed to the Senate by NJ Gov. Corzine. (From a foreign, technical perspective, this was defensible&#8211-Menendez&#8217-s seat was vacant, so the winner on Nov. 7 would count it as a &#8220-gain.&#8221- However, the Republicans did not contest Menendez&#8217-s very Democratic seat, so in the American convention, it was never counted as a Democratic pickup.) Tradesports&#8217- convention effectively said that the Democrats gained two more seats than the American convention did, and several days after the November elections, the American convention said that the Democrats had gained 28 House seats with 1 certain to go Democratic in a runoff (in Louisiana), so 29 seats total, while the Democrats had effectively gained 31 seats according to TS. Hence the problem with DEMS.HOUSE.OVER29.5. And while a legalistic interpretation would favor TS, I believe that the synchronization of DEMS.HOUSE.OVER14.5 and 100 – p(HOUSE.GOP.2006) indicated that most trading during the final few days showed that the market was unaware of TS&#8217- own convention for the election outcome.

I sent Tradesports an e-mail about it (apparently they don&#8217-t accept new entrants to their forum anymore, because my application has been pending for about a month), and they replied that the new number of Democrats minus 201 would constitute the number of Democrat gains, thus contradicting what they had told &#8220-gekko6.&#8221- I then publicly denounced TS for waffling the issue. TS did nothing, and apparently hoped the controversy would blow over. A bunch of recounts in close races later, TS appears to have lucked out, because according to the American convention, the Democrats now have at least 233 House members, up from 202-plus-one-Socialist, so the American system now says the Democrats have gained 30 seats and DEMS.HOUSE.OVER29.5 has been fulfilled either way.

Honestly, I was impressed that TS understood the American system as well as they did. Unfortunately, TS&#8217- subsequent &#8220-flip-flopping&#8221- showed that it did not, in fact, understand its own contract specifics. It also fit a larger pattern of cavalier disdain for its clients, often interpreting an ambiguous outcome significantly contrary to that of the market-majority (Harriet Miers confirmation, NK missile test contract) without appropriate compensation, setting up a joke &#8220-Arbitration Committee&#8221- that, if it even exists, has done nothing except infuriate customers, and most recently expiring sports contracts before the games were even concluded &#8211-and coincidentally raking in tons of expiry fees from people who weren&#8217-t given a chance to liquidate.

The latter, in fact, has happened with enough cavalier consistency that one can only wonder whether TS simply plans on milking its American consumers for as much as possible before closing the site to new American participants as a result of the recent US legislation. SportsBook has downgraded Tradesports to a C+ rating, which is at the very low end of what SportsBook can vouch for.

If TS plans on more effectively structuring its futures contracts, it should structure them along the lines of, &#8220-At 11:59:59 PM GMT on dd/mm/yyyy, Democrats will control ON or OVER XXX seats in the US House of Representatives.&#8221- If it wants to undertake a broader effort to restore its own credibility, it needs to stop the caprice that is fast becoming the norm for how it adjudicates contract outcomes&#8211-whether that adjudication occurs before or after the outcome has actually occurred. [added:] TS&#8217- infrastructure and trader base are both excellent, and there&#8217-s no point in wasting those assets on sloppy legalese and interpretation.

&#8211-Alex Forshaw

http://the-ts-maven.blogspot.com

Tradesports forum homepage: http://forum.tradesports.com/

Addendum: As for 100 – p (HOUSE.GOP.2006) vs DEMS.HOUSE.OVER14.5, I remember them consistently mirroring one another, and thinking to myself, &#8220-Aha! Efficient markets at work.&#8221- However, what little historical data TS makes publicly available makes it hard to judge that, and there were snapshots when the two were de-coupled, so perhaps a minority of perceptive traders _did_ trade on the differences in the rules. But in the sample of snapshots that I looked at, the two were coupled (within 2 points) much more often than not during the final days, when liquidity was high enough to make arbitraging the two contracts a worthwhile use of capital.

PEAR lab (Princeton Engineering Anomalies Research) – REDUX – Retrocausality in physics

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In my previous blog post, I said that Princeton professor Robert Jahn has been unable of finding the right hypothesis about the so-called &#8220-psychic phenomena&#8221- (if any). I mentioned the work of a theoretical physicist, Olivier Costa de Beauregard, who interprets the E.P.R. paradox using the concept of &#8220-retrocausality&#8221- (the reversal of the arrow of time). I said that, speaking of the so-called &#8220-psychic ability&#8221- (if any), one could interpret the so-called &#8220-precognition&#8221- (if any) as a reversal of the psychological arrow of time, where the mind could receive information coming from its own future.

Well, today, via Jason Kottke, we have some news from the scientific world that scratches this concept of &#8220-retrocausality&#8221- (which we should not confuse with &#8220-finality&#8221-, I was told), and which seems to comfort the Costa de Beauregard&#8217-s interpretation:

Quantum theory describes the behavior of matter and energy at the atomic and subatomic levels, a level of reality where most of the more familiar Newtonian laws of physics (why planets spin, airplanes fly and baseballs curve) no longer apply. The problem with quantum theory, put simply, is that it&#8217-s really weird. Findings at the quantum level don&#8217-t fit well with either Newton&#8217-s or Einstein&#8217-s view of reality at the macro level, and attempts to explain quantum behavior often appear inherently contradictory. &#8220-There&#8217-s a whole zoo of quantum paradoxes out there,&#8221- Cramer said. &#8220-That&#8217-s part of the reason Einstein hated quantum mechanics.&#8221- One of the paradoxes of interest to Cramer is known as &#8220-entanglement.&#8221- It&#8217-s also known as the Einstein-Podolsky-Rosen paradox, named for the three scientists who described its apparent absurdity as an argument against quantum theory. Basically, the idea is that interacting, or entangled, subatomic particles such as two photons &#8212- the fundamental units of light &#8212- can affect each other no matter how far apart in time or space. &#8220-If you do a measurement on one, it has an immediate effect on the other even if they are separated by light years across the universe,&#8221- Cramer said. If one of the entangled photon&#8217-s trajectory tilts up, the other one, no matter how distant, will tilt down to compensate. Einstein ridiculed the idea as &#8220-spooky action at a distance.&#8221- Quantum mechanics must be wrong, the father of relativity contended, because that behavior requires some kind of &#8220-signal&#8221- passing between the two particles at a speed faster than light.

This is where going backward in time comes in. If the entanglement happens (and the experimental evidence, at this point, says it does), Cramer contends it implies retrocausality. Instead of cause and effect, the effect comes before the cause. The simplest, least paradoxical explanation for that, he says, is that some kind of signal or communication occurs between the two photons in reverse time. It&#8217-s all incredibly counterintuitive, Cramer acknowledged. But standard theoretical attempts to deal with entanglement have become a bit tortured, he said. As evidence supporting quantum theory has grown, theorists have tried to reconcile the paradox of entanglement by basically explaining away the possibility of the two particles somehow communicating. &#8220-The general conclusion has been that there isn&#8217-t really any signaling between the two locations,&#8221- he said. But Cramer said there is reason to question the common wisdom. Cramer&#8217-s approach to explaining entanglement is based on the proposition that particles at the quantum level can interact using signals that go both forward and backward in time. It has not been the most widely accepted idea. But new findings, especially a recent &#8220-entangled photon&#8221- experiment at the University of Innsbruck, Austria, testing conservation of momentum in photons, has provided Cramer with what he believes is reason for challenging what had been an untestable, standard assumption of quantum mechanics.

&#8212-

Parting Shot: If &#8220-psychological retrocausality&#8221- (&#8220-precognition&#8221-, actually) could be engineered one day, then we could make a killing on prediction markets. I could have sold short the SENATE.GOP.2006 contract at TradeSports, and made as much money as scientist David Pennock did (or so he claims &#8212-and I saw that some vendor also made this self-interested and undocumented claim).

TradeSports-InTrade: United Nations > John Bolton as US Ambassador to United Nations – REDUX

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I&#8217-ve spotted an interesting comment from Canadian trader Sacha Peter on the TradeSports forum:

This will be an interesting contract. Essentially, will Bush recess appoint him? I can&#8217-t see him getting past the senate confirmation process.

I lost a few bucks (literally, it wasn&#8217-t huge) in the previous confirmation debacle, so the way they worded this contract is very unambiguous and Tradesports appears to have learned one lesson.

So here&#8217-s the contract statement:

This contract will expire at 100 if John Bolton is the US Ambassador to the United Nations at 11:59:59pm on the date specified in the contract.

This includes (but is not limited to) confirmation by the US Senate or a recess appointment by the President.

The contract will expire at 0 if John Bolton is not the US Ambassador to the United Nations at 11:59:59pm on the date specified in the contract.

This includes (but is not limited to) withdrawal of the nomination by the President, withdrawal by John Bolton himself, failure to be confirmed by the US Senate or appoinment to an &#8220-acting UN Ambassador&#8221- role under the Vancacies Reform Act.

Due to the nature of this contract please also see Contract Rule 1.9 Unforeseen Circumstances.

The Exchange reserves the right to invoke Contract Rule 1.8 (Time Protection) if deemed appropriate.

&#8212-

This entry is a follow-up on my previous blog post.

&#8212-

Price for John Bolton as US Ambassador to United Nations at TradeSports.com

Prediction Markets vs. Political Pundits – 2006 US Senate (GOP control + individual races)

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&#8230- More exactly TradeSports-InTrade and Iowa Electronic Markets VERSUS The McLaughlin Group (PBS).

Reason Magazine writes:

Weirdly, the McLaughlin Group, the fustiest of all the talking head shows, had one of the best records this cycle, with Eleanor Clift, Lawrence O&#8217-Donnell, and John McLaughlin all predicting Democratic takeover of the Senate and calling nearly all of the close races correctly. Still, that old line about stopped clocks comes to mind.

Reality Check:

Vo, vo, vo. Not so fast. The McLaughlin Group is made up of five members. Three of them predicted the Dems in the US Senate, and so (if I&#8217-m correct) the associated probability was 3/5 = 60%. It does not strike me as an unanimous consensus.

As for TradeSports, Professor Lance Fortnow wrote that all (NOT: &#8220-nearly all&#8221-) individual 2006 US Senate races were predicted correctly.

More Links:

– The McLaughlin Group (PBS + CNBC Europe)

– 2006-11-03: Transcript – Audio (MP3) – Video (MP4) –

Parting Shot:

If the small-L and capital-L libertarians at Reason Magazine sides with the leftist bloggers and media in the anti-PM backlash, and if some from-day-one prediction market supporter goes amock, then the logical conclusion is: The Prediction Markets Have NOT Arrived Yet.

The five minutes on my 15 minutes of WSJ fame.

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Coming from a politics-obsessed family, we (family and I) have been fans of predicting election outcomes for as long as I can remember. We are all conservative-libertarians of one hue or another, and I began writing &#8220-wingnut&#8221- screeds in eighth grade for my junior-high newspaper. What with the Florida Bush recount and 9/11, a superpoliticized era had dawned. My first forecast was 2002, and I got all the Senate races right but for one. Uncanny, I thought. Then came 2004, and I nailed that one too. Really uncanny&#8211-but then again, every clock was right twice a day, and this being the high and higher tide of &#8220-my side,&#8221- my predictions didn&#8217-t seem so uncanny in retrospect.

Fast forward to October 2006, and I was a junior in college with a mediocre academic record in finance and Chinese. An election was gearing up. I wanted to put my forecasting ability to the test. I also realized that, by blogging the rationales for my trades, it could become a valuable tool in my quest for a summer internship/job, to represent a side of me that my GPA didn&#8217-t represent at all. Not exactly lacking confidence, I put $2500 where my mouth was, and soon afterwards plowed in another $1000. I shifted in and out of many positions, but the common denominator was (as I said on my own blog some days ago) that I believed the market was underestimating the intercorrelation between congressional races, and especially Senate races all over the country. In other words, I bet very heavily on the Democrats taking both houses.

Three or so weeks into my blog, I was getting scattered, but very positive feedback about my material. People in Tradesports threads began quoting it, and a major Tradesports speculator asked me for some further opinions regarding the direction of the 2008 US presidential nominations markets. (I told him not to do anything other than short Hillary, but to especially not short Barack Obama, until after the election, and I couldn&#8217-t have any &#8220-gut feeling&#8221- until I had gauged what a Dem election victory would mean.) So I knew my material was good, but I was still pretty surprised, not to mention ecstatic, when WSJ reporter Jim Browning contacted me for information about election prediction markets. So I happily gave him everything he asked, and the superb WSJ article was the result. (That&#8217-s the non-$$, Pittsburgh P-G version.) But as our conversations continued into election night, I begain to despair about my positions&#8230-

In Virginia, George Allen had about a 12,000-vote lead with about fifteen counties remaining to vote. I knew they were in the pro-Webb counties (Fairfax, Loudoun, Richmond City&#8230-) but those precincts ranged from barely better than even to 72-28 (Richmond). Webb would have required statistically&#8230-.unlikely turnout and/or margins in order to win. A lot of people on DailyKos and other communities emotionally invested in a Webb victory, processing new updates literally seconds after they came, had given up on Webb. Harry Reid came on TV and his body language screamed, &#8220-I don&#8217-t think the Senate is in play anymore, even though I thought it was a couple of hours ago&#8230-but that was too much to ask, anyway.&#8221- Without Virginia, the calculations for the Democrats&#8217- taking the Senate became very grim, very fast.

Final polls (which I had spent the previous weekend trashing) showed VA breaking for Webb, comporting well with my own intuition. As the returns came in, however, Allen seemed to have an insurmountable lead with about 96% of precints reported. I concluded that Allen would win re-election, barely. Michael Barone&#8217-s forecast to the contrary, I noticed that the remaining precincts to report were healthy-majority Democrat (about 60-40, 65-35), but I didn&#8217-t think that Webb would be able to cut Allen&#8217-s lead in half&#8211-well, maybe half, but not zero it out. (I learned only later that when Virginia says &#8220-precincts reporting,&#8221- it apparently does not include absentee ballots when it says that. Or it reported them before it started tallying up the actual votes from the voting booths on that day. Or something. But a bunch of absentee ballots flowed into Fairfax later that netted about 7k more votes for Webb.)
However, rewinding to that despairing moment, the Democratic machines in Richmond City, Fairfax and Loudoun had waited until all other precincts had reported before reporting. Now, I don&#8217-t know about Virginia, but I know that in Missouri, the urban Democratic machines in STL and KC have a certain notoriety (in some circles, anyway) of waiting until every other precint has reported, and then releasing surprisingly high results (that usually imply incredible voter turnout&#8211-certain STL precincts reporting 97%, 100+% turnout isn&#8217-t unheard of), magically pushing the Democratic candidate over the top by a fraction of a percentage point. (I don&#8217-t want to start a flame war here&#8211-I think American politics is a blood sport, both sides have their different ways of playing dirty, and this was just something I didn&#8217-t factor in.) And six to twelve months after the election, some low level Democrats get a year in jail for voting fraud. It happens like clockwork, except that this time around I don&#8217-t think the MO Dems will need to resort to that. But I digress&#8230-

So I figured VA was lost when it wasn&#8217-t, and I puked up all the SENATE.GOP shorts. At one point, over 50% of my entire principal was gone. Then, after despairing for about ten minutes, I went back to the TS markets intending to try and make back what I could. Then I realized that Webb had magically jumped into a 2200 vote lead in VA with 100% of precincts counted. I had already looked at the counties and their turnout/margin statistics and figured that couldn&#8217-t have happened, but it had. So after losing over a couple grand&#8230-not to mention feeling like a complete idiot for throwing away $8000 by buckling at the last possible second, I hopped back on the SENATE.GOP train and rode it down to zero, and made back that entire original investment, plus about $150 left over.

So a lot of lost hair, Wheat Thins, NoDoz, bad grades and exhaustive political analysis later, I felt pretty vindicated, even though I had managed to squander 90% of the potential compensation. (I did indeed lose hair.) I had staked 1,000 shorts against SENATE.GOP.2006, well against the majority view of the market. As I recall, total volume going into the election was 35k or 40k trades, but because some significant fraction of that was the same positions being flipped back and forth between a stagnant pool of traders before I&#8217-d arrived, it was probably closer to 5% of outstanding positions. If my money hadn&#8217-t buttressed the market-minority&#8217-s view, the price would have been even more inaccurate&#8211-before election day, the price hovered around 70 percent, and without my heavy position on the &#8220-minority&#8221- side, it would have been closer to 80-20 in favor of the GOP holding onto the Senate. Plus, going into the election, I had stuck by my calculations even as the market had continued to erode my investment. Having that kind of confidence and analytical precision vindicated meant much more to me than $8-9000 in potential winnings lost.

&#8211-Alex Forshaw

P.S. On that non-mercenary note, I&#8217-m seeking an internship this summer involving event derivatives trading/research or options trading, either academia- or finance-based. If you&#8217-re interested, please e-mail to: alex.forshaw@gmail.com

SCIENTIST DAVE PENNOCK IS LAUGHING ALL THE WAY TO HIS NEW YORK BANK.

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&#8230- Psstt&#8230- TradeSports traders&#8230- Wanna be rich?&#8230- Do like David Pennock: Get a PhD&#8230- with a major in probabilities&#8230-

Although TradeSports’s individual state predictions and overall Senate prediction were entirely consistent, one might argue that traders underestimated the degree of dependence (correlation) among states’ elections. In fact, I made a few bucks selling the “GOP Senate control” contract on TradeSports using exactly that reasoning. The truth is, I probably just got lucky, and it’s nearly impossible to say whether TradeSports underestimated or overestimated much of anything based on a single election. Such is part of the difficulty of evaluating probabilistic forecasts.

The TradeSportss NKM scandal vs. the BetFairs 2006-Senate case

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JC Kommer was prompt to comment on my 2006-Senate piece:

Double standard Mr Masse.
Betfair is doing exactly the same thing that Tradesports in the NKM “scandal”, going for the literal reading of the rules as they should.

My Answer To JC Kommer:

I disagree.

NKM Scandal: TradeSports made two grave errors. Number one, they engraved in marble that they would rely ON A SINGLE SOURCE OF INFORMATION (the US DOD) for the expiry of the contract. This is totally crazy. The truth should be established using as many reliable sources as possible or appropriate (including second-hand but reliable sources like the White House, which is fed by the DOD on military issues). What matters is the truth, gathered from multiple sources, not one particular source that could have an irrational or secretive behavior at some specific times. Number two, while establishing this one-single-source-for-expiry contract, TradeSports was not aware of the well known and public fact that the US DOD never issues detailed statements on North Korea matters. Information about North Korea is &#8220-classified&#8221-. Logically, the US DOD did not confirm directly and in a very formal way that North Korea fired missiles. (Note that a case can be made that the US DOD did indeed confirm the North Korea firing of missiles, directly and in an elliptic way, which many observers found it satisfying enough for expiry purpose). So, in my view, as I have described above, TradeSports made two grave errors. They apologized to their traders, but they did not take action to compensate the victims of their two errors. The victims here are the &#8220-yes&#8221- speculators on the NKM prediction market. They were correct in their prediction, but they lost their shirt in the end. Note that the &#8220-yes&#8221- bettors and virtual speculators at BoDog and NewsFutures were justly gratified for their accurate prediction on the NKM topic. Which shows once again that the problems originated from TradeSports, and not from the &#8220-yes&#8221- speculators. TEN CEO John Delaney (managing TradeSports) should have compensated the victims. Instead of that, the first action he took on the Monday when the scandal broke was to retaliate against Chris Masse, who gave airtime to the screwed-up &#8220-yes&#8221- speculators.

2006-Senate Case: There are no &#8220-victims&#8221- here, since BetFair sticks with the ORIGINAL contract &#8212-as CLEARLY written ON DAY ONE on their &#8220-RULES&#8221- tab, and as understood correctly by everybody who can read plain English. NO SURPRISE, NO CONTROVERSY. “Which of these parties will have MORE SEATS in the US Senate following the 2006 US Senate Elections?” is a very different question than &#8220-Which of these parties will CONTROL the US Senate?&#8220-. There is no ambiguity in the first question. In the second question, it&#8217-s understood that you could control the US Senate with your allies (the Independents).

BetFair: Which of these parties will have more seats in the US Senate following the 2006 US Senate Elections?

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Republicans: 49%

Democrats: 53.8%

Ex-BBC News Mike Smithson (of the Political Betting blog) wonders whether BetFair will count the two Independent U.S. Senators (Liberman and Sanders) in the Democratic camp.

Lieberman won re-election as the “Connecticut For Lieberman” party candidate – an independent political party he created after losing the 2006 Democratic primary election to Ned Lamont. He has said he will sit as part of the Democratic Senate caucus in the upcoming 110th Congress.

Sanders won yesterday in Vermont as an independent but will caucus with the Democrats and it is said will be counted as a Democrat for the purposes of committee assignments.

The problem that Betfair will have to resolve is that neither ran as a Democrat although they will be attached to the Democrats in the Upper House.

To add to the complication Nick Palmer, MP, posted this on the previous thread at 1.34pm – “I have it in writing from Betfair that they will count the two independents as Democrats. (I asked them a month or two ago before I put a tenner on.) If you have opposite advice in writing, they should be embarrassed!”.

Addendum: From one commenter&#8230-

The question was “Which of these parties will have more seats in the US Senate following the 2006 US Senate Elections?”

The options were Republicans and Democrats. The result is 49-49 with two independents.

It’s a draw- I can’t see how anyone can see otherwise.

Addendum 2: From Yahoo! News (whose data are provided by the Associated Press)&#8230-

Liberman (CT) and Sanders (VT) are counted as Democrats.

Addendum 3: From the Washington Post frontpage&#8230-

Editor&#8217-s Note: Independent members of Congress typically caucus with the Democrats.

Addendum 4: From the New York Times&#8230-

Full Senate Results &#8212- Republican: 49 &#8212- Democratic: 50 – Includes independents who align with the Democratic caucus. &#8212- [CFM’s NOTE: Virginia is still in play at the time of writing.]

Addendum 5: Mike Smithson&#8230-

So punters who are tempted into this market are risking money on how they think Betfair will settle the market.

Faulty polls screw up the political prediction markets. – REDUX – The no polls case, now.

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Two days ago, I stated brashly that political prediction markets aggregate the polls, mainly. (Mike Linksvayer nuanced my propos, in the comment area.)

GOP Keeps Senate, Loses House, Betting Site Says. – [US political prediction markets] – by Ronald Kessler – 2006-10-24

One theory is that prediction markets are influenced by the results of opinion polls. But if that were true, individual polls would also influence each other. Moreover, long before the Internet and opinion polls came into existence, election betting was accurately predicting election outcomes. From 1884 to 1940, betting was conducted on Wall Street by specialized brokers called betting commissioners. The betting odds for each candidate were published daily in the New York Times and other papers. The so-called New York betting markets correctly predicted 12 of the 13 presidential elections between 1884 and 1940, according to Koleman S. Strumpf, Koch professor of economics, University of Kansas School of Business, who co-authored a paper examining the markets. In the one exception, the betting swung to even odds by the time the polls closed. The Gallup Poll, the first scientific opinion poll, began in 1935. The arrival of opinion polls and stricter anti-gambling laws drove out the New York betting markets. The Internet has led to their revival.

Paper: Historical Prediction Markets: Wagering on Presidential Elections – (PDF) – by Paul W. Rhode and Koleman S. Strumpf – 2003-11-10

My Question: Before 1935 (that&#8217-s when George Gallup crafted the first scientific polls), what the hell those political prediction markets were aggregating, for Christ&#8217-s sake??? And where is our good doctor Koleman Strumpf when we need him?

Previous blog posts by Chris F. Masse:

  • Become “friend” with me on Google E-Mail so as to share feed items with me within Google Reader.
  • Nigel Eccles’ flawed “vision” about HubDub shows that he hasn’t any.
  • How does InTrade deal with insider trading?
  • Modern Life
  • “The Beacon” is an excellent blog published by The Independent Institute.
  • The John Edwards Non-Affair… is making Memeorandum (twice), again.
  • Prediction Markets = marketplaces for information trading… and for separating the wheat from the chaff.

Faulty polls screw up the political prediction markets.

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In today&#8217-s soapbox:

Yet it turns out that in 2002, IEM markets indicated that Republicans would lose the house. Which we now know is wrong. They were pretty consistent in their 2004 presidential prediction, however. I recall that Surowiecki discussed the fact that the predictive markets for congressional elections tended to be less accurate than the presidential ones&#8211-because fewer people got involved in the betting.

Wrong. Volumes are OK. If I remember well, the polls were wrong in 2002, so don&#8217-t look any further for the cause of failure of those IEM prediction markets.

Paper That Documents This 2002 IEM Debacle: Iowa Electronic Markets – (PDF) – by Paul Gomme – 2003-04-15

Until September, Republican control of the House was seen as a 50–50 proposition, while their control of the Senate received a probability of around 20 percent. In October, the likelihood of a Republican-controlled House fluctuated between 65 percent and 90 percent while the likelihood of a Republican Senate fluctuated around 40 percent. It was not until election day results came in that market participants locked in on the eventual outcome: Republican control of both the House and Senate. Of course, this outcome was generally a surprise: Neither pollsters nor political commentators called the Republican win in the Senate.

I Disagree With This Paragraph Of The Same Paper:

Better than Gallup? The IEM political markets have a couple of advantages over their closest “competitor,” the public opinion poll. One advantage is that data from the IEM are available virtually instantaneously and almost continuously. Results from polls are typically several days old when they are reported and are taken at discrete intervals. Consequently, data from the IEM are more amenable to studying events like the untimely death of a Senate candidate. A further advantage of the IEM is that contracts can be written based on intrinsically interesting events, such as who controls the House or Senate. Poll results require more massaging to answer such questions.

My Take: Give the polls a break, and quit saying that our predictive market-generated technology is a &#8220-competitor&#8221- to the polls. Without polls, the political prediction markets could return to the locker room. Plus, prediction markets aggregate probably [see comment] more than just the polls.

Hint: A public roasting of David Perry over his impersonating of George Gallup is in the tube and will be published soon on this blog.