Yearly Archives: 2008

Analysis of Barr and Nader 2008 Intrade contracts

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I&#8217-ve used the Bob Barr contracts at Intrade to poke fun at the totally unrealistic expectations of Libertarian Party advocates (a couple times at Midas Oracle), so here&#8217-s a brief (and completely amateur) analysis of those contracts (and Nader contracts), post-election.

You may need to click on each chart to see the whole thing.

The probability of Barr obtaining 1% or more of the vote remained about .4 (40%) throughout the past several months. More optimistic scenarios became more discounted as the election grew nearer, and presumably it became clear Barr would not break through. Even 1% would have been seen as a breakthrough by LP advocates, but in the end Barr obtained only 0.4% of the vote. (Note that obtaining .4% of the vote and a .4 probability of obtaining 1% of the vote are very different things!)

Ralph Nader contracts attracted very little trading, though the 1% or greater contracts gave Nader a 60% chance of obtaining 1% of the vote as late as early October. Nader contracts for 3% and above did not trade at all &#8212- or almost not at all &#8212- Intrade&#8217-s web page table (screenshot below chart) shows a few trades, but no advanced chart or closing price/volume download, and there seemed to be an (unrelated?) possible bug with Nader contract reporting fairly consistently &#8212- last trade prices would not be remembered and reported in the aforementioned table &#8212- or it could be user (me) error/misunderstanding.

Both Barr and Nader contracts were traded heavily (for them) post-election, presumably as traders freed up cash and unwound positions &#8212- for unkown reasons Intrade still has not expired the contracts.

Spurred by comments from David Nolan (scan the page for &#8220-Intrade&#8221- or my name), I also attempted to gauge what traders thought about the average vote percentage candidates would receive across all scenarios &#8212- even a small chance of a genuine breakthrough could make an otherwise hopeless campaign (in the LP&#8217-s case, 9 such presidential campaigns prior to 2008) worthwhile. See below for the average (not most likely!) vote percentage over time each candidate might be expected to receive if the campaign were re-run may times. Assumptions: a floor of .5% (cases in which 1% is not met), very generous given that Barr did not reach even that, and only one LP candidate ever has, if candidate crosses threshold, they do so by .5%, also generous, and if 7% (the highest contract) is crossed, they obtain 7.5% of the vote, slightly ungenerous given the non-impossibility of obtaining a much higher percentage of the vote. Longshot bias should also expected to be at play. I don&#8217-t think these numbers should give LP or other third party advocates any comfort, though I admit my own bias on the matter. The average of all Barr scenarios declined steadily as the election approached, while Nader contracts did not trade until closer to the election, and they both ended at an average of 1% across all scenarios just before the election.

In the end Nader received 0.54% of the vote, beating Barr for (a very distant) third place behind Obama and McCain.

All of the data used above may be found in intrade-2008-barr-nader.zip. The spreadsheet file intrade-2008-barr-nader.ods aggregates everything.

2012

I&#8217-d like to see:

  • Fewer contracts (in 2008 there were 7 for Barr and Nader each, from 1% through 7%- actually 8 each counting an electoral vote contract that received almost no attention) might be better, and one testing 0.5% of the vote, which is a more relevant barrier for the LP (only broken once, in 1980) &#8212- maybe 0.5%, 1%, and 3%, or perhaps a single log-scaled contract.
  • Minor vote total contracts contingent on nominee &#8212- assuming they had attracted trades, would they have expected the more mainstream for US politics (but less mainstream among libertarians) Bob Barr to outperform other candidates for the LP nomination?
  • Even better than contingent nominee/vote total contracts, contingent nominee/some measure of welfare or liberty contracts. Presumably these would show no difference among LP nominees, on the theory that no such nominee will make a difference in the world.
  • More trades! Why are libertarians afraid of the market?

My open challenge to InTrade CEO John Delaney

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InTrade CEO John Delaney:

Our #1 untapped resource is the vast collective intellect that we have only started to use. Harnessing the &#8220-wisdom of the crowd&#8221- has a very big potential role in improving all of our lives. If we do it, we all have a voice and will feel part of the solution as well as the problem. We can solve some wicked problems, like climate, resource, growth, social, and economic challenges. In simple terms, there exists between us the best information on how we solve our key challenges. If our leader’s embrace and permission new systems like prediction markets to operate in a transparent prudent way I am convinced that we can contribute in no small part to the solution.

Recall, that US Department of Defence believed a prediction market could provide valuable information on growth, risks and social issues. Hundreds of academics, dozens of Fortune 500 companies, and millions of people believe that prediction markets can help provide valuable information on economic, financial, social and environmental issues.

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I have already expressed my deep skepticism for this kind of grandiose discourse.

Today, if I may, I would like to ask these questions to John Delaney:

  1. We have just experienced one &#8220-wicked&#8221- problem, recently &#8212-the credit crunch crisis. Can you demonstrate that InTrade was &#8220-part of the solution&#8221-?
  2. Speaking of the credit crisis, for instance, what makes you think that InTrade can be &#8220-part of the solution&#8221-, whereas it is now documented that the World Economic Forum (a.k.a. Davos), where 2,500 &#8220-global leaders&#8221- gather each year, have failed miserably in raising interest for the speakers who were talking about this (then, looming) financial crisis? Is InTrade really stronger than Davos?
  3. Would you mind giving us specific instances, taken from the past 12 months, where the InTrade prediction markets were of high social utility to society?
  4. Can you cite the names of some research scientists who are endorsing the idea that the real-money prediction markets (from either InTrade or BetFair) &#8220-can contribute in no small part to&#8221- the solutions to the world&#8217-s &#8220-wicked problems&#8221-?
  5. What would you respond to those who say that, during the 2008 US presidential election campaign, the InTrade prediction markets sucked up to Nate Silver?

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Here are my thoughts:

  1. I agree with InTrade CEO John Delaney that prediction markets are interesting, but I disagree when he suggests that they are radical tools &#8212-they are subtitle tools, actually.
  2. I agree with InTrade CEO John Delaney that prediction markets are (somewhat, I would say) useful to society &#8212-but the demonstration should be done using Robin Hanson&#8217-s guidance.

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APPENDIX:

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What Nate Silver predicted:

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What InTrade predicted:

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The Objectivity -according to BetFair

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BetFair Predicts (a blog run by BetFair) titled &#8220-The Power Of Objectivity&#8221- a post giving the latest odds produced by BetFair on the race for the White House.

The real &#8220-objectivity&#8221- would have been to quote the odds produced by the other prediction exchanges, too &#8212-InTrade, Iowa Electronic Markets, Betdaq, NewsFutures, HubDub, etc.

Midas Oracle is the only blog that lists prices and probabilities from all the prediction exchanges. No wonder, our daily readership is much, much bigger than the audience of all the other prediction market blogs combined. A blog that gives the odds of one exchange only is like a dead end &#8212-no one trusts a dead end.

Please, do support Midas Oracle.

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Futarchy Lite 2008

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Below is a copy of a post yesterday on my personal blog. First, a couple asides for Midas Oracle readers.

After 2008

Two of Peter McCluskey&#8217-s four sets of contracts produced interesting results while all of Polimetrics&#8217- were duds. (Not complaining- I&#8217-ll take the successes.) What should we take from this, other than a subsidy being helpful? (How helpful?)

It would be nice to see improved versions of the two successful sets offered for 2012 and perhaps for control of the US Congress in 2010. The Iraq contracts could be generalized to expected number of troops killed, number of troops abroad, or even size of the military budget.

It would be great to see conditional contracts for non-US jurisdictions as well.

On Intrade&#8217-s part, I&#8217-d really, really like to see implied outcomes and graphs of same built into the Intrade interface. Their lack is a huge barrier to understanding conditional contracts, both for journalists and bloggers who might come to appreciate their importance, and even for traders who need to understand them, even really smart traders.

Futarchy Lite?

Futarchy imagines that constituents or their representatives specify (presumably democratically) desired outcomes and prediction markets evaluate whether specific policies further desired outcomes, neatly captured in the phrase vote on values, bet on beliefs. One could imagine a variety of implementations, in particular concerning how policies are proposed, but that&#8217-s the basic framework.

So what does the guide have to do with futarchy?

It encourages voters to govern their own vote as a policy making body would govern policies. Presumably individuals have values or can decide on them, so there&#8217-s no voting, but one can use prediction markets to determine how they should vote in order to further their values. So the catchphrase for the futarchist voter guide below or what I&#8217-ll call &#8220-Futarchy Lite&#8221- is vote with your values, consensus beliefs. Ok, that&#8217-s not at all catchy. And I&#8217-m afraid to too many people interpret values and beliefs to be roughly the same, but that&#8217-s a bigger problem.

Mike&#8217-s Futarchist Voter Guide (also posted on Mike&#8217-s blog)

Four years ago I used play money contracts traded at the Foresight Exchange to provide a Futarchist Voter Guide (though I didn&#8217-t call it that). This U.S. election cycle relevant real money contracts are traded on Intrade.

The first set was instigated and subsidized by Peter McCluskey. Two have attracted a fair amount of interest and seem to be informative. They have consistently indicated that a Democrat will result in a smaller (but still approaching US$1 trillion!) increase in the US federal government debt over one year and a smaller number of US troops in Iraq. (The others, regarding the movement of oil and interest rate futures on election day, have shown no difference between expected election outcomes.)


Above: Expected increase in US Government debt between 30 Sep 2010 and 30 Sep 2011 if party wins US presidency.


Above: Number of US troops in Iraq on 30 June 2010 if party wins US presidency.

Note that briefly in early September the contracts indicate lower debt and fewer troops in Iraq with a Republican candidate. I suspect this is due to McCain&#8217-s brief surge following the GOP convention &#8212- the implied outcomes above depend on election winner contracts, and with a much lower volume, presumably take awhile to fully respond to rapid shifts in election outcome expectations.

A second set of relevant contracts instigated by Polimetrics have unfortunately attracted almost no trading and probably tell us nothing. Note however they also reflect the brief McCain surge, at which point they implied a greater than 100% chance of growth, low unemployment, and lower crime with a McCain win. They have since reverted to showing essentially no difference between Obama and McCain. Note that each series only starts when there have been trades.


Above: Percent chance that economic growth averages 2.5% or more for 2009-2011 if individual wins US presidency.


Above: Percent chance the US unemployment rate is less than 5.0% at the end of 2011 if individual wins US presidency.


Above: Percent chance the number of violent crimes committed in 2010 is lower than the number of violent crimes committed in 2007 if individual wins US presidency.

Peter McCluskey has automatically updated pages showing implied outcomes for each set of contracts given their latest trades.

(I intended to make a page with frequently updating graphs, but got lazy when Peter published the aforementioned pages, and only collected the data until now, which is available in a spreadsheet.)

The proper way to predict Obamas electoral vote count

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I&#8217-m puzzled by the way Intrade projects the electoral vote count on its home page. Two methods are proposed: (a) add up the votes of all the states that are &#8220-leaning&#8221- (&gt-50%) for a candidate, or (b) compute a price-weighted average. The latter is obviously meaningless because electoral votes are winner-take-all in pretty much every state.

But what about the &#8220-leaning&#8221- method? Well, it only makes sense if you believe that market prices do not represent probabilities. In fact, the &#8220-leaning&#8221- method treats the 15 electoral votes from a swing state like North Carolina (65% chance to go blue) the same way it treats the 15 votes from a true-blue state like New Jersey (95% chance to go blue), tossing them both equally in the Obama column.

Now, Intrade has been known to want it both ways: interpreting its prices as probabilities most of the time, but then also claiming that it correctly predicted all 50 states in 2004 because all the contracts priced over 50% eventually expired at 100%. This claim conveniently ignores the fact that if prices are probabilities, then at least some of the states priced &#8220-red&#8221- or &#8220-blue&#8221- over 50% should in fact have gone the other way on election day.

It may very well be that, given the 2004 data, the prices of election markets (on Intrade and elsewhere) should not be interpreted as probabilities. Perhaps our academic friends can come up with another meaningful way of looking at those prices. But in the meantime, assuming the price/probability correlation holds, the proper way to project the electoral vote count from the market prices is to run monte-carlo simulations based on individual state prices.

Here&#8217-s an example using this morning&#8217-s prices on NewsFutures. The histogram shows the results of 1 million simulated elections where each state goes red or blue according to its market-derived probability of doing so. Note how the &#8220-most likely&#8221- outcome, 364 votes for Obama – which is the number the &#8220-leaning&#8221- method would report – is at the same time very unlikely with just 5% chance of happening.

Enterprise prediction markets help organizations mitigate risks.

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IT Business Edge – (I love the name of this magazine):

Seeking opinions from a diverse group of employees rather than just the usual decision-makers helps organizations mitigate risk, says Adam Siegel, co-founder and CEO of Inkling, Inc., a provider of prediction market software. “You want as much information as possible upfront so you can react to possible problems,” he says.

Siegel reads the 10K statements of potential clients to help identify their hot-button issues. When they express interest in the markets but wonder what kinds of questions to pose, he suggests establishing markets examining risk factors such as how pricing fluctuations affect the market for a company’s products or how acquisitions may impact the competitive landscape.

A drawback of prediction markets is that they won’t reveal the factors behind the bets. But, says Young, “If a red flag is raised about a particular issue, it’s not hard to go back and investigate” to determine the root causes of problems. “The bigger problem for most companies is they just don’t know what’s going to happen, and the red flag never goes up.”

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– Excellent article.

– If you have missed our previous post, see here our little excerpt of the Forrester report.

– Adam Siegel is CEO of Inkling Markets, as you all know. His company website is very interesting to read. If you have never done it, do it right now. The general concept of prediction markets is explained, and they go down and dirty on how to set up your own enterprise prediction markets.

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