Is InTrade being manipulated? Why does InTrade give a discounted probability for Barack Obama as US president?

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A quick link panorama.

#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:

– 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&#8230- so that the abrupt perturbations would be eliminated.


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.

UPDATE: Are we witnessing manipulation attempts on the &#8220-Florida to vote Republican&#8221- prediction market at InTrade?

#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&#8217-s a Republican conspiracy all over.

– Professor Justin Wolfers puts up an hypothesis: it&#8217-s legally impossible for US traders to arbitrage on BetFair.

– InTrade put up a crappy excuse: the industry is still too &#8220-young&#8221-. How lame. How stupid. The industry was younger in the previous elections, where arbitrage opportunities didn&#8217-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&#8217-s a second blatant cretinery, uncorrected by the Portfolio blogger. Re-read Justin Wolfers&#8217- 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.

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.

Prediction markets on who is going to win an election are more accurate then the final Gallup poll.

Signed: Eric Zitzewitz

Watch the video.

Read the previous blog posts by Chris. F. Masse:

  • WARREN BUFFETT: I said that the US dollar might be “worth less” in five to ten years —not that it might be “worthless”.
  • The Year Of The Rat should bring $$$ to the prediction market industry and the event derivative traders.
  • WordPress founder Matt Mullenweg is my hero and so he should be yours.
  • InTrade-TradeSports has seen more than $50 million wagered on the U.S. presidential election.
  • LinkedIn will be data-mining its database of millions of users to find potential experts.
  • Britons can’t get enough of Yankees’ politics.

Prediction markets = A tool for quantifying the conventional wisdom

No GravatarEric Zitzewitz responded to Paul Krugman:

Almost all of the serious people who study or work with these markets are not in the “markets are magic” camp.

My work in this area (with Justin Wolfers usually and Andrew Leigh and Erik Snowberg occassionally) uses these markets as a way of quantifying the conventional wisdom.

This has more value than may be immediately apparent. It can help you get from “the market rose 0.25% in response to Obama’s Iowa victory” to “the market rose 0.25% in response to Obama’s Iowa victory, which raised his nomination probability by 20% and did not affect the Democrats odds of winning in November” to an estimate of how much more stocks will be worth under Obama than Edwards or Clinton.

In corporate settings, a market can help turn something that “everyone knows” into an objective fact that can then be acted upon. The best example is probably markets on whether software projects will be completed on time– if a market run among the project team members says that the launch will be 2 months late, it becomes harder for the project manager to insist that everything is on track.

Eric Zitzewitz
Assoc. Prof. of Econ
Dartmouth College

Thanks to Jason Ruspini for the link. Jason also posted a comment on Paul Krugman&#8217-s post, and also on Felix Salmon&#8217-s post.

Previous blog posts by Chris F. Masse:

  • NUCLEAR SCANDAL: HubDub allow their traders to bet on celebrities’ death.
  • APRIL FOOL’S DAY: This year, again, CNET makes fun of the wisdom of crowds.
  • Play-money prediction exchange HubDub is a phenomenal success.
  • BetFair Australia’s spin doctor tells all about their payments to the horse race industry.
  • Meet Jeffrey Ma (at right on the photo), the ProTrade co-founder, and whose gambling life is the basis of the upcoming movie, 21.

Sounds like Sean Park will strike it rich, once again.

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Sean Park (Founding Partner at Sixth Paradigm, and blogger at The Park Paradigm)

Sean Park is a leading independent thinker on the future of financial markets, the author of The Park Paradigm, and the founding partner of Sixth Paradigm LLP:

The technology of the digital age is driving an unprecedented explosion in the ability to create markets in anything. Trade anything. Not just physical goods. Not just financial instruments. But ideas. Events. Outcomes. The emergence of these kinds of markets will – over time – impact how we view and interact with the world in all aspects of our personal and professional lives. They will fundamentally alter the current world economic and social paradigm.

Sean is also a founding investor in innovative companies such as Betfair and WeatherBill (where he is also a non-executive Director) and has extensive experience investing in and advising start-up and high growth companies in addition to over 16 years of experience working at a senior level in capital markets and investment banking. Building businesses has been a key theme throughout his career.

I&#8217-m bullish on WeatherBill. They showed that an event derivative exchange can have a more user-friendly interface &#8212-stuff that BetFair-TradeFair and TradeSports-InTrade have not computed yet. I wonder whether the WeatherBill approach could work out with other risks &#8212-other than weather.

On Sean Park, as a blogger, one of my sources said to me that he sometimes elaborates on ideas invented by others years ago and makes it like they are his. I&#8217-m a brand-new feed subscriber to his little blog, so I&#8217-ll judge by myself.


Previously: Thoughts on Weather Bill – by Eric Zitzewitz – 2007-01-04

What I think is most innovative is the idea of marketing a prediction market contract as “insurance.”

Prediction Markets Definitions – REDUX REDUX

No GravatarI would like to comment on the post from the Hatena Diary blog. (By the way, please note that my URL has changed, because I corrected one word in the post title. Sorry for the inconvenience.)

#1. Speculation-oriented prediction markets/exchanges: TradeSports, BetFair.

#2. Hedging-oriented prediction markets/exchanges: HedgeStreet and all the Chicago exchanges that will do binary, European call options.

#3. Forecast-oriented prediction markets/exchanges: Iowa Electronic Markets, AS CLAIMED BY THESE SCHOLARS WHOSE TASK WAS TO CONVINCE THE CFTC TO GRANT THEM A NO-ACTION LETTER. (They would have not gotten it, had they emphasized &#8220-speculation&#8221-. And, of course, &#8220-hedging&#8221- was out of question.) It&#8217-s a &#8220-claim&#8221- that might be discussed, since we&#8217-ve seen that TradeSports-InTrade is a much more powerful predictive tool for the US elections. Ditto for BetFair for U.K. elections.

#4. Decision-oriented prediction markets/exchanges: I would put here the kind of stuff that Robin Hanson is so excited about.

#5. Entertainment-oriented prediction markets/exchanges: Hollywood Stock Exchange, Washington Stock Exchange, Inkling, NewsFutures.

#6. Education-oriented prediction markets/exchanges: The Iowa Electronic Markets fits here, partially, regarding the use that professors around the country make of their markets in classrooms.


– I disagree with Google in #4. Maybe the Google internal prediction markets would fit in #3.

– I disagree with NewsFutures in #3 &#8212-I acknowledge (at least partially) the predictive power of play-money prediction exchanges, of course.


Should we judge markets/exchanges on INTENTIONS or on RESULTS? I don&#8217-t give a damn that TradeSports-InTrade and BetFair were created for speculation– if they have better predictive power than IEM, I&#8217-m fine with them. Ditto for the HSX. I don&#8217-t give the first fig that it was created as an entertainment tool. It&#8217-s the best forecasting tool for the movie business, period.


For the links to the prediction exchanges, see CFM.


Previous Blog Posts:

Prediction Markets DEFINITIONS – not a “taxonomy”

Professor Robin Hanson’s draft definitions is validated by professor Eric Zitzewitz.

Prediction Markets Definitions – REDUX

Prediction Markets Definitions – by Robin Hanson – 2006-11-21


Addendum: Robin Hanson has posted a comment&#8230-

“Oriented” is not clear enough for my tastes. Is this about trader motives? Trader results? Price results? Exchange motives?


My Answer: I meant &#8220-exchange motives&#8221-. [&#8230- See my comments. &#8230-] But now that I think of it, another classification taking account of the &#8220-price results&#8221- makes more sense.

Previous blog posts by Chris F. Masse:

Partisan impacts on the economy: Evidence from prediction markets and close elections – by Erik Snowberg, Justin Wolfers and Eric Zitzewitz – REDUX

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The breaking news is that Professor Justin Wolfers (of the Wharton business school in Philadelphia) has responded to my unforeseeable attack and to the subsequent Mike Linksvayer&#8217-s comment.

A quick response to Chris:
Let me clarify what I think the key puzzle is: the odds of either Democrats or Republicans are – literally – unchanged since the week before the 2004 election. It seems amazing to me that there has been *no news* that is relevant to the 2008 election.

And I don’t really know which way it should have gone (I’m not yet calling ‘08 for the Dems). For instance, Bush winning in ‘04 provides the Republicans with an incumbency advantage. Countering that, the last two years have provided the Dems with an advantage in the midterms, which you might think could persist to ‘08. And the cast of possible candidates is also starting to take shape, and the absence of Warner, the rise of Barak, and the continuing dominance of both Hillary and McCain are all important factors that we didn’t know about two years ago. All of this is hard to reconcile with the odds remaining unchanged.

I[n] response to Mike’s point: he is exactly correct to emphasize the difficulty in discerning the direction of causation between election outcomes and economic outcomes. But that is precisely the point of my forthcoming QJE paper with Snowberg and Zitzewitz (available at: PDF).

In that paper (which is what I describe in the WSJ), we look at stock market reactions to what are clearly random (or exogenous) shocks to the expectations of Bush’s re-election – the leaked exit polls, and the subsequent vote count. These experiments allow us to draw inferences about how changes in electoral prospects drive economic outcomes.

The Abstract Of That Paper:

Partisan impacts on the economy: Evidence from prediction markets and close elections – by Erik Snowberg, Justin Wolfers and Eric Zitzewitz – (PDF) – 2006-03-XX

Analyses of the effects of election outcomes on the economy have been hampered by the problem that economic outcomes also influence elections. We sidestep these problems by analyzing movements in economic indicators caused by clearly exogenous changes in expectations about the likely winner during Election Day. Analyzing high frequency financial fluctuations following the release of flawed exit poll data on Election Day 2004, and then during the vote count, we find that markets anticipated higher equity prices, interest rates and oil prices and a stronger dollar under a Bush presidency than under Kerry. A similar Republican-Democrat differential was also observed for the 2000 Bush-Gore contest. Prediction market based analyses of all Presidential elections since 1880 also reveal a similar pattern of partisan impacts, suggesting that electing a Republican President raises equity valuations by 2 3 percent, and that since Reagan, Republican Presidents have tended to raise bond yields.