Inexperienced Illinois senator (and presumptive Democratic nominee) Barack Obama should pick Kansas governor Kathleen Sebelius as vice president candidate to bring executive experience to the Democratic ticket -and to piss off Hillary Clinton (which will delight me).

No Gravatar

ENDLESS VEEPSTAKES: Why you should never trade on VP prediction markets, and why their probabilistic predictions are as stochastic as Paris Hiltons daily dress picks.

No Gravatar

As I explained in early June 2008, the VP speculations that appear in the Press should never be taken seriously. Most of them (and you don&#8217-t know which ones) are a big orchestration of pure lies aimed at creating publicity, or wicked lies in the form of trial balloons. The aims of the political campaigns are to:

  • creating suspense (sometimes false) so as to generate free publicity-
  • sending a positive message to the supporters of each VP candidate-
  • letting the Press do the vetting of the VP candidates-
  • flattering the political journalists by leaking to them-
  • sending out false leaks so as to preserve the surprise for the scheduled announcement day-
  • sometimes, buying time to impose the head of the VP search committee as the most serious VP candidate (remember Dick Cheney in 2000). [Psstt… Funny enough, in the 2008 election, Michael Moore is pulling for Caroline Kennedy. :-D ]

All that means that there are no good primary indicators for the prediction markets on the Democratic and Republican VP-candidate selections.

I want to offer 6 remarks:

  1. Not all prediction markets are created equal. Some have good primary indicators (e.g., the prediction markets on the presidential elections, thanks to polls), while some other prediction markets have unreliable primary indicators (e.g., the prediction markets on who will be on the ticket).
  2. The prediction exchange executives (like InTrade-TradeSports CEO John Delaney) will never tell you that, because their job is to sell their wares, of course.
  3. The public needs prediction market analysts, who can judge the quality of the primary indicators of one particular prediction market, so as to separate the grains from the shaft &#8212-reliable prediction markets from unreliable prediction markets. (A prediction market analyst has also other functions, which I will blog about later on.)
  4. A prediction market analyst should have a dual competency &#8212-in a vertical (in our example, US politics), and in prediction markets.
  5. The expertise in the vertical (here, politics) should be a major, and the expertise in prediction markets should be a minor. Take a look at these 2 mainstream media news stories: the one written Jack Shafer in Slate (which I linked to at the top of this post), and the one written by Justin Wolfers in the Wall Street Journal. Obviously, the one that shows the most mastering is the one written by Jack Shafer, an American professional journalist who follows US politics for a living.
  6. The consequence of that for prediction market journalism is that the writer should be an expert in a vertical, and the editor should be an expert in prediction markets &#8212-and not the other way around.

That said, I wish the very best of luck to our good friends Caveat Bettor (who is betting on Tim Kaine) and Nigel Eccles (who is predicting Joe Biden). :-D

UPDATE: My (informal) Democratic VP-candidate bet is on Kathleen Sebelius. Hint, hint.

UPDATE: Gawker says that Joe Biden would be a horrible choice. I agree. Plus, he has denied to be the pick. He could have lied to reporters, though.

UPDATE: New York Times publishes portraits of all VP candidates.

DEVELOPING&#8230-

NEXT: While InTrade CEO John Delaney is deceiving the journalists to sell his wares, Tom Snee of the Iowa Electronic Markets is telling them the truth: BEWARE THE VP-CANDIDATE PREDICTION MARKETS, THEY JUST AGGREGATE RUMORS.

Share:

Arbitrage in the InTrade Dem VP Market

No Gravatar

There has been an unexploited arbitrage opportunity in the Intrade Democratic VP market (&#8221-2008 Democratic VP Nominee (others upon request)&#8221-). As the attachment shows, you can sell the slate of candidates for 123.2 (just sum the bids) while you will only have to payout 100. This possibility has existed for at least three weeks, and is particularly puzzling now given that the announcement is likely to occur this week.

What is also a bit odd is that Intrade has another market (&#8221-2008 Democratic Vice-Presidential Nominee (with Field contract)&#8221-) on the same outcome which includes a catch-all field contract which does not have the same arb&#8211-again see the attachment below. It is substantially cheaper to buy the field contract in the second market than the omitted candidates (Kaine, Sebelius, Hagel, Schweitzer, Gephardt, Kerry, and others) in the first market.

Any thoughts on why this is occurring?

attachment: intradedemvp_summedbidsexceed100.pdf

InTrades market data shows that the sliding Dow Jones Industrial Average has an exceptionally strong negative correlation (approx. -0.91 over the last 10 weeks) with the rise in the InTrade Market for Barack Obama to be the next US President.

No Gravatar

UPDATE: Some smart comments, just below&#8230-

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

No Gravatar

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.

US ELECTORAL MAP: Prediction Markets for the 2008 Electoral College

No Gravatar

ELECTORAL COLLEGE MARKETS: Probabilistic predictions for the 2008 US presidential elections based on market data from InTrade Ireland &#8212-(electoralmarkets.com).

By Lance Fortnow, David Pennock, and Yiling Chen. :-D

For more on probabilistic predictions, go to our &#8220-Predictions&#8221- page, or visit the prediction exchanges.

Alternatively, if you want an electoral map made of polls, go to electoral-vote.com.

Bob Barr markets

No Gravatar

Reason, a libertarian periodical, writes that the Bob Barr effect is &#8220-confirmed.&#8221- Because Obama&#8217-s campaign manager says it is.

Yes, pathetically a pro-market publication heeds the remarks of a political operative rather than markets that say Bob Barr will not make an impact.

Admittedly we have very little signal from prediction markets and lots of noise from political operatives, so writing about the latter makes for easier journalism.

There are now Intrade contracts on Barr&#8217-s share of the popular vote. Perhaps they&#8217-ll provide a little more signal, but I don&#8217-t have high hopes for reasonable trading volume &#8212- or for libertarian politicos embracing markets when the message of market prices might not correspond to their hallucinations.

VP conditional probabilities

No Gravatar

BetFair is running markets on both who will be the next vice president and who will be nominated by the two parties.

As we&#8217-ve discussed before in other contexts, one can divide two probabilities like these to obtain a conditional probability: e.g., if the Democrats put X on the ticket, they will win the general election Y% of the time (where Y = odds of X becoming VP/odds of X being nominated).

These markets are thin, so the conditional probabilities should be taken with a grain of salt. But they are interesting nonetheless:

The pattern I see here is that conditional probabilities are higher for fresh faces (Webb, Sebelius- and arguably Bayh and Richardson despite their longer tenure) than for the old guard (Clinton, Nunn, Biden).

Of course, these should be viewed as correlations, not necessarily causal effects. For example, two possible explanations are: 1) putting a fresh face on the ticket helps Obama, either because there is less baggage or less of a contrast in national-politics resume length, or 2) Obama will only pick an old guard candidate in the state of the world in which he needs to shore up a weakness (i.e., picking Clinton to end a civil war, or Nunn to add foreign policy experience).
On the GOP side:

Huckabee has the highest conditional probability, and Pawlenty and Jindal are noticeably lower. Interpreting this one is harder: it depends on what aspect of Huckabee one thinks the market is expecting to be appealing (religion, likeability, Southernness, selective economic populism).

Technical note: the bids and asks reported above are actual quotes scrapped this AM- the mids are (bid+ask)/2, rescaled to add to 100 across all candidates.