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:
*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?