Have you ever visited Intrade, which brands itself as the leading prediction market? You can make a market in almost anything these days, it seems.
West face of the United States Supreme Court building in Washington, D.C. Español: Edificio de la Corte Suprema de Estados Unidos en Washington, D.C. (Photo credit: Wikipedia)
Intrade is a prediction market based in the Republic of Ireland, and lets you bet on predictions in all kinds of areas, including the future president of the United States. These bets are made in the form of contracts; if you believe the prediction will come true, you can buy the contract; otherwise you can sell or short-sell the contract.
Here are some interesting contracts currently open on the market:
Barack Obama to be re-elected President in 2012 61.3%
Mitt Romney to be elected President in 2012 37.2%
The US Supreme Court to rule individual mandate unconstitutional before midnight ET 31 Dec 2012 62.7%
Feb 2013 (G13) Gold Futures to close ON or ABOVE 1800 on 31 Dec 2012 52.0%*
Monthly House Price Index for Vancouver to be 121 or less before the end of 2013 20.0%
*If you look at the gold contracts, there are clearly some arbitrage opportunities. Why would “on or above 1800″ have a higher chance than “on or above 1700″, for example?
The advantages of a prediction market
Some of the advantages of a prediction market include the following:
- Participants can put their money where their mouth is.
- Hidden knowledge can be brought the the forefront. It’s one thing to talk about the issues when you have no personal stake in the matter, but when money is involved, people tend to follow their interests. Hidden knowledge by well-informed betters can be brought to light in this manner.
- Results of betting can help other market participants plan for the future. If there’s a reasonable chance that Obama will be the next president, for example, that helps you plan your personal finances and prepare for what comes ahead.
The disadvantages of a prediction market
- The downside of having a lot of skin in the game is that you may use that to try and influence the results. Now, legitimate means of influencing results are fine: If you have a strong belief that Vancouver housing prices are going to crash, then I think it’s perfectly legitimate to short-sell the market and put your money where your mouth is. If you’re right, you’ll help the market get to the “right” price more quickly, and that benefits everyone.
However, what if you manipulate politicians and others with the power to alter laws, and bring about your scenario through illegitimate means? I could imagine someone with a large amount of money staked in housing prices going UP bribing city officials and others to impose arbitrary lines, beyond which property cannot be built. Everyone except the city officials and developers suffers when stuff like this happens. Of course, stuff like this happens all of the time even without a prediction market, and maybe the market helps spread awareness of the issue.
What are your thoughts? Do you agree that prediction markets should be illegal in North America? Or do you feel they have a valuable role to play in diffusing privileged information and making it available to everyone?
I love Intrade – it definitely proved its worth in 2006 and 2008 elections in the States, nailing Senate control, presidency, and which states would pick which candidates. It also adjusted early in 2010 during the Republican wave, especially in Nevada where it caught Harry Reid’s surprise victory before the media was reporting it.
If only it was more liquid, haha. I wonder sometimes if campaigns manipulate it to appear stronger than they actually are… of course, that opens up opportunities to win money, heh. The market decides!
If they manipulate it then they’re open to arbitrage! I suppose if these markets got big enough though they could self-feed on sentiment, much like the housing markets and others sometimes do. Unlike the housing market the corrections would probably also come much sooner…
I used to use intrade a bit. Still have an account but noticed recently that there’s a $5 monthly fee regardless of activity. that’s draining down my account fairly quickly so not a big fan of that. My other problem has been the huge bid/ask spreads for all but the most popular contests (like presidential election etc).