Allegedly, an idiot pressed the wrong button on March 16s InTrade ObamaCare prediction market. Do you buy it?

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Marcus Shea:

Here’s the most likely scenario as to what happened here:

Somebody had a decent short position. Say they had about 65 shares (the volume bars indicate that this was likely a &lt- 100 share transaction, ie, &lt- $5 worth of commissions for Intrade, so mentioning commissions / greed as a motivator is pure ignorance). They wanted to put up a buy of 65 shares at say 5%, so that if the price ever dips that low, they can close their short position and wind up with a nice profit. And then, big mistake, they hit sell instead of buy. The market plummets. Mystery solved. It&#8217-s called human error.

Paul Krugman Makes a Boo Boo.

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In Paul Krugman&#8217-s blog entry, Done, at 4:39pm (EDT) on March 21, 2010, he commented: &#8220-OK, nothing is sure in this world. Intrade is still giving Obamacare a 2.2% chance of failing, …&#8221-

He was talking about the InTrade market on Health Care Reform. In theory, the market price in such a derivative market should equal the expectation of the underlying event coming true. However, Paul Krugman (and many others) forgot one of the most basic assumptions of the market model! Transaction costs.

When the market price is over 95, InTrade charges a transaction fee of 3 cents per contract (real money). While market prices are quoted in percentages, the payoff for a winning ticket is $10 (real money). Therefore, the transaction fee is 0.3% of the winning payoff. In addition, InTrade charges 10 cents per contract on expiry (if you &#8220-win&#8221-). That&#8217-s another 1.0%.

So, when the market was quoting 97.8% likelihood of the HCR bill passing before June 2010, this didn&#8217-t really mean that there was a 2.2% chance of the bill not passing. A winning ticket would be subject to 1.3% transaction fees. The real likelihood of failure was 0.9% &#8211- approximating the uncertainty that Obama would be &#8220-hit by a bus&#8221- before signing the bill into law.

No rational investor would wish to purchase a share for more than 98.7, given the transaction costs. In a sense, this is the market&#8217-s &#8220-100%&#8221-. Interestingly, at 1:49pm GMT today (March 23), there are 695 bids at 99.1 and 413 asks at 99.2. Clearly, some traders are not subject to the full transaction fees at InTrade. More about that here.

[Cross-posted from Toronto Prediction Market Blog.]

The Real Arithmetic Of The Health Care Reform

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The Real Arithmetic Of The Health Care Reform &#8211- NYT &#8211- by a former CBO director.

Required reading for Paul Hewitt. :-D

Prediction Market Chart

ADDENDUM

More info on health care reform on Memeorandum, Politico and Slate.

Nate Silver: InTrade probability on ObamaCare is quite right.

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Nate Silver:

I&#8217-m not sure if you should particularly care about the little 5 or 10 point hedges (usually to the pessimistic side) that I&#8217-ve periodically been recommending around the Intrade contract on the chances of reform passing. Even if you staffed a whole room full of the smartest vote-counters, modelers and analysts and had them work 24/7 on trying to beat the Intrade contract, I&#8217-m not sure if they could come up with anything sufficiently rigorous to provide them with a real advantage. (That doesn&#8217-t necessarily mean the market is &#8220-efficient&#8221-, but we&#8217-ll save that conversation for another day.) But for what it&#8217-s worth, the Intrade contract, which is trading at 75 percent right now, now looks about right to me or perhaps even a hair pessimistic.

Prediction Market Chart

ADDENDUM

More info on health care reform on Memeorandum, Politico and Slate.

OBAMACARE PREDICTION MARKET WAS BRIEFLY MANIPULATED YESTERDAY EVENING SO IT WOULD ARTIFICIALLY CLOSE AT $35. – [CHART]

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IT IS NOW BACK TO ABOVE $60.

See Jason Ruspini&#8217-s comment. UPDATE: Carlos Graterol. Joe Weisenthal. Gawker. Max Keiser.

Prediction Market Chart

ADDENDUM

More info on health care reform on Memeorandum and Politico.

What has been the best InTrade prediction market ever? Has the ObamaCare prediction market at InTrade been ahead of the commentary?

Jason Ruspini (who feels that the health care reform proposal might well be adopted) wanna feedback from you, folks.

  1. Which InTrade prediction market(s) has/have been ahead of the Press (rather than the other way around)? What is/are the best (most divergent from the commentary, and correct) InTrade prediction market(s) in people&#8217-s memories?
  2. Do you sense that the ObamaCare prediction market at InTrade fits these 2 criteria?

UPDATE: I asked The Brain whether he meant generalist media or political media, and he meant &#8220-generalist&#8221-. That makes all the difference in the world.

Prediction Market Chart

ADDENDUM

More info on health care reform on Memeorandum.

Previously: Insider trading in the InTrade prediction market on health care reform?

Max Keiser weighs in on potential insider trading and hypothetical manipulation in the ObamaCare prediction market at InTrade.

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Max says that the political prediction markets are &#8220-routinely manipulated&#8221- and we often see &#8220-price rigging&#8221-&#8230-

9:57 into:

Previously: What has been the best InTrade prediction market ever? Has the ObamaCare prediction market at InTrade been “ahead of the commentary”?