Is Intrade out on a limb?

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As I write this, Intrade gives the advantage to McCain over Obama and has the Republican party even with the Democratic party to win the election, whereas all the other prediction markets, meaning IEM, Betfair, and the NewsFutures play-money kind still favor a Democrat in the White House. That disconnect prompted Chris to wonder aloud whether Intrade is faster than the other markets to incorporate the latest polls, perhaps because of its &#8220-bigger liquidity&#8221-.

That&#8217-s an interesting reaction on several levels.

First, reactivity and accuracy are not to be confused for one another. Given that market prices are supposed to be more accurate and more stable that fickle U.S. raw polls (Berg et al, 2008), one should not necessarily be impressed by the market that is quickest to mirror the latest polls. I very much doubt that traders in the &#8220-other&#8221- markets have not heard about the latest polls giving McCain an edge. Rightly or wrongly – it is too soon to tell – they just gave those polls less weight that the Intrade traders apparently did.

Second, the argument from &#8220-bigger liquidity&#8221- is not receivable. Recently, Paul Tetlock analyzed Tradesports data in depth and found that more liquidity may in fact make the market dumber. He concludes: &#8220-In both sports and financial prediction markets, the calibration of prices to event probabilities does not improve with increases in liquidity- and the forecasting resolution of market prices actually worsens with increases in liquidity.&#8221-

My personal theory is that Intrade has a hair-trigger Republican bias which is not found in the other markets, because Intrade appeals to, and is marketed to, the more Republican-leaning segments of the U.S. population. In my opinion, the Intrade/Tradesports Republican bias was already evident in the 2004 election, as this analysis shows.

Of course, I may be completely wrong. In any case, I find today&#8217-s dual disconnect between the polls and most of the markets, on the one hand, and between Intrade and the other markets, on the other hand, to be two very interesting data points that should be duly recorded so we can come back to them later, with hindsight.