Why collecting and synthesizing the dispersed available information?

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Sean Park (after a long, boring introduction to the subject):

[…] The ‘failure’ of New Hampshire was the result of primarily two factors:

  1. It wasn’t a failure. No market is always right. More importantly markets reflect the information available to and the interests of their participants. Basically markets are very efficient mechanisms (I would claim the most efficient) for processing information. No more, no less.
  2. In this particular instance, the probability of the market producing an erroneous forecast was high due to the lack of liquidity. This is a problem of all political markets in the US. Show me a market on the New Hampshire primaries with tens of thousands of participants and millions of dollars traded and I will show you a market that creates more valuable information. BUT it would still on occasion be ’surprised.’

Basically I guess what I’m trying to say is the expectations seem to be set all wrong by many inside the community. I think “prediction markets” – creating markets in information and outcomes is a wonderfully important and valuable thing to do. Equally however I think that anyone that represents such markets as being able to predict the future is a charlatan. What they can do is collect and synthesize powerfully and efficiently all the dispersed available information – using money as the relevance filter. This is very valuable in its own right and is defensible. Promoting prediction markets to true sceptics (ie mainstream American politicians) on the basis that they are a Delphic Oracle is surely a path to certain tears and ultimately is almost guaranteed to fail. [*]

Markets don’t compute unknown unknowns. That doesn’t mean they are useless, just that they have to be understood in context.

[*] How to promote the prediction markets, then? As information collecting tools? Who should use these tools, then? Experts or ignorants? Sean Park does not elaborate further. None of the questions I have asked are answered.

InTrade is no psychic -but what if that bit of truth is systematically said BEFORE, as opposed to AFTER.

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David Leonhart in his New York Times blog, last week:

The political prediction markets just went through their version of the dot-com bubble. […]

Intrade’s odds have had a very good forecasting record over the last few years, having correctly called every Senate race in 2006, every state in the 2004 presidential election and all but one state in the 2004 Senate races. The odds also correctly called New Hampshire for John McCain this week and now make him the favorite for the Republican nomination- he is given a 38 percent chance, while Rudolph W. Giuliani is given a 29 percent chance.

Intrade’s executives, as well as the academic researchers who study the site, are careful to point out that its contracts provide only odds, not certainties. An outcome that’s given a 20 percent chance of happening should happen 20 percent of the time — not never. […]

The question I asked yesterday was: What would happen if that warning label were to be sticked on InTrade before each election, as opposed to after each predictive debacle? My bet is that, if you suppress the mention of InTrade&#8217-s magical touch, the Irish real-money prediction markets will be far less appealing to people. They want magic. All of the sudden, InTrade is not a psychic anymore, but simply a forecasting tool of convenience for busy people who don&#8217-t want to check the polls in details. This issue is crucial if we want to be able to define what is the &#8220-prediction market approach&#8221- &#8212-as opposed to the &#8220-betting exchange approach&#8221-.

Give me one reason why the political analysts should follow the US primaries thru the prism of the InTrade prediction markets instead of thru the polls. [My question is still unanswered, you will notice. Which shows to you the embarrassment of the prediction market luminaries (or so they think they are).]

Once the true nature of the prediction markets appears more clearly, it becomes evident that they are not tools for the experts, but tools for the ignorants, rather. Which is great, provided that this is said clearly from the start.

Can the prediction markets survive without the over-selling from John Delaney and his little fanboys?

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Emile Servan-Schreiber:

[…] The classic first line of defense in these cases is to remind people that market “predictions” are really just probabilities, so any one outcome cannot invalidate the approach. The argument is sound and backed up by loads of data. But it would of course be much more convincing if we, as an industry, would remember to show at least as much humility when our market “predictions” appear correct instead. If you’re going to spread the idea that your market called all 50 states in the last U.S. presidential election because each correct outcome was predicted with over 50% chance, then you can’t hide behind probabilities when an 80% prediction comes to naught, as in Obama’s NH collapse. […]

Emile Servan-Schreiber makes a good point &#8212-see also Panos Ipeirotis, in the same vein.

But the over-selling is the reason [*] why InTrade (and not NewsFutures) has managed to infiltrate so many US media. If you suppress the magical touch, then InTrade is just a forecasting tool of convenience &#8212-for those too busy to look at the polls.

Give me one reason why the political analysts should follow InTrade instead of the polls, then?

What is the true nature of the prediction markets? How to use the prediction markets? Who should use the prediction markets? For what benefits? Once you have the answer to these 4 questions, you can tackle the next two problematics: How to market the prediction markets without over-selling them. How to report news thru the prism of the prediction markets while respecting their true probabilistic nature.

Welcome to the version #2 of the prediction market industry. Quite a horse of another color, now.


[*] UPDATE: The over-selling aspect is the topping over the real-money and the liquidity dimensions. The over-selling aspect wraps all that.

Prediction markets are forecasting tools of convenience that feed on advanced indicators.

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Why were the political prediction markets so wrong about Barak Obama and Hillary Clinton in New Hampshire?

&#8230-asks Slate&#8217-s Daniel Gross &#8212-via Mister Usability (Alex Kirtland), who needs to go and get his own gravatar.

So, I&#8217-ve been watching the action in one of the political futures markets this evening, Intrade. And the action in this prediction market has reinforced my opinion that these are less futures markets than immediate-past markets. The price movement tends to respond to conventional wisdom and polling data- it doesn&#8217-t lead them.

Throughout the day and into the early evening, while polls were still open, Democratic investors, mimicking the post-Iowa c.w. and polls, believed Obama was highly likely to be the Democratic nominee. The Obama contract was trading in the lows 70s, meaning investors believed he had a 70 percent chance of being the nominee, while Hillary Clinton contracts were in the 20s. […] At 6 p.m., this market had written Hillary Clinton&#8217-s entire presidential campaign off. At 9:30 p.m., it was calling a dead heat. What caused investors to change their minds so drastically in the space of a couple of hours? A few data points that went against the day&#8217-s prevailing conventional wisdom and polls. […]

See also Niall O&#8217-Connor&#8217-s assessment:

I am looking forward to the post New Hampshire Caucus, when all you prediction market advocates crawl out from under your stones. For the record at one point the market on Intrade and Betfair was suggesting that Obama had a 95% probability of winning the caucas- whilst Intrade had him at 77% to win the nomination.A case perhaps of both the foolery of crowds and, the market biting back.

New Hampshire will go down as the Black Wednesday of prediction markets and unless there is now objective transparent debate (as opposed to the usual biased sabre rattling) – prediction markets will be dead in the water.

My answer to Dan Gross&#8217- legitimate question and to Niall O&#8217-Connor&#8217-s snarky comment:

  1. Prediction markets are forecasting tools of convenience that feed on advanced indicators. When those advanced indicators are wrong, the prediction markets are wrong.
  2. If you prefer the polls or the pundits, your call &#8212-but polls and pundits were also wrong, this time, right? Required reading for mister Niall O&#8217-Connor: &#8220-New Hampshire&#8217-s Polling Fiasco&#8221- + &#8220-Analysis: pundits eat crow&#8220-.
  3. The ultimate forecasting tool would be a way to reverse our psychological arrow of time &#8212-so as to remember the future instead of the past. Only science-fiction writers and some imbecile ( :-D ) believe in that.
  4. The prediction market approach is to stick with the markets, on the long term. Take their successes. Take their failures. Unlike Donald Luskin and Markos Moulitsas, Chris Masse will not turn against the prediction markets when they fail punctually. What counts is the long series.
  5. My first point should be included in the prediction markets approach definition, in my view, but others (like economist Michael Giberson) might have different opinions.
  6. With respect to my first point, I bet that the prediction markets will never replace the polls as the forecasting tool of choice for political analysts &#8212-on that particular point (but not on a myriad of others), I break away from Justin Wolfers&#8217- irrational exuberance and I side with Emile Servan-Schreiber of NewsFutures (my preferred play-money prediction exchange). Prediction market reporting will have a function, indeed (as suggests Justin Wolfers), but not the dominant function.
  7. Going forward, prediction market journalism should emphasize relative accuracy (as opposed to absolute accuracy) &#8212-that is, comparing prediction markets with polls and pundits, which is what Robin Hanson has said from day one. Our good friend Niall O&#8217-Connor has difficulty to compute that, apparently. He should eat more fish. :-D


Justin Wolfers:

In a few years, we may regard the second half of the 20th century as the aberration in which the press used polls rather than markets to track political races,” Justin Wolfers, a business professor at the University of Pennsylvania’s Wharton School, wrote in an e-mail message. “And in the 21st century, we may return to the habits of the early 20th century, reporting on political races through the lens of prediction markets rather than polls.

Emile Servan-Scheiber:

1) The traders themselves are the first to look at the polls to inform their trades. So the polls are here to stay.

2) Our recent experience in Western Europe seems to indicate that the superior accuracy of markets over polls when predicting elections may be a U.S. artifact that isn’t so easily reproducible elsewhere. I’ve discussed this with Forrest Nelson of IEM [Iowa Electronic Markets], and apparently, ever since the Truman-Dewey polling debacle of 1948, U.S. pollsters have adopted a policy of reporting mostly raw numbers rather than projections based on sophisticated secret formulas, so they can’t be accused of manipulating opinion. However, raw numbers are notoriously unreliable when based on small samples, and Western European pollsters never report them, preferring instead to publish projections based on historically-informed statistical formulas. What we’ve observed in France and Holland is that it it’s very hard to beat the accuracy of such projections.

[I don’t make mine Emile Servan-Schreiber’s second point, but that’s a minor.]


InTrade&#8217-s expired prediction markets:


New Hampshire


The Democrats


The Hillary Clinton event derivative was expired to 100.

Dem NH Clinton

Dem NH Obama

Dem NH Edwards


The Republicans


The John McCain event derivative was expired to 100.

Rep NH McCain

Rep NH Romney

Rep NH Huckabee

Rep NH Giuliani




The Democrats.

The Barack Obama event derivative was expired to 100.

Dem Iowa Obama

Dem Iowa Clinton

Dem Iowa Edwards


The Republicans

The Mike Huckabee event derivative was expired to 100.

Rep Iowa Huckabee

Rep Iowa omney

Rep Iowa McCain


Source: InTrade


[A more complete prediction market reporting should have included expired contracts from NewsFutures and BetFair. Sorry for that. Note that InTrade-TradeSports is the only exchange to offer a “closed contacts” section.]


NEXT: Prediction Markets 101 + Who did best in explaining the prediction markets to the lynching crowd? + After the New Hampshire fiasco, 16 people came to defend the prediction markets, so far. + The prediction markets deserve a fair trial. + Prediction Markets = the greatest time-saving invention of this century