Betting to Improve the Odds

The New York Times looks at how companies are using predictions markets in corporate decision making. I’m a fan of predictions markets and I like to follow some contracts at Intrade.com and Tradesports.com.
I look at these markets as like a parlor game. They’re fun and interesting. Still, there are some drawbacks. First, to be truly effective, the markets must have many participants and it should be very liquid. Secondly, these markets are subject to the kind of biases that all markets are.
For example, at Intrade.com, the contract for Ron Paul to win the GOP nomination is currently 1.3/1.5. I can tell you right now, that Ron Paul does NOT have a 1.3% chance to win the GOP nomination.
His chances are, in fact, ZERO. As in ZERO POINT ZERO. In sophisticated circles, this is known as a Blutarsky. In absolute zero, where all atomic movement ceases, that’s Ron Paul’s chances. No way. Never. In a million years, still wouldn’t happen. Bottomline: The dude ain’t gonna win.
So if markets are efficient *cough cough* why isn’t his contract going for zero? The answer is that it’s a market that’s influenced by partisanship. There are some folks who will buy the contract to boost their candidate’s profile. In November and December, the Paulster’s contract came very close to hitting 10 cents.
I’m not sure if you can short contracts at Intrade, but if you can, there’s a profit opportunity. This is similar to how sophisticated sports bettors know to go against teams from big cities. The partisanship distorts the market.
Another aspect about predictions markets is that I don’t think they’re properly named. They’re really not predictions markets, but odds setting markets.
It’s become fashionable to look at how the markets got something wrong, are thereby, declare them a failure. The markets simply set the odds low for something that eventually came about. Would we ever say the same about financial markets? Going by today’s share price, Google’s IPO price could be called mis-priced. Did that mean that the stock market failed? Not at all, the price adjusted with more information.

Posted by on April 9th, 2008 at 10:58 am


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