Tuesday, February 12

Prediction Markets

As the New York Times noted recently, prediction markets tend to be better predictors than polls. Before Super Tuesday I predicted a McCain-Clinton race with McCain winning. Right now, the biggest prediction market - Intrade - has Obama at over 70% to win the democratic nomination. It also has him as a much better chance (48.8%) than McCain (32.6%) to win the presidency even though McCain has his nomination wrapped up. This strikes me as absurd.

Although Obama has done better than I expected, I still think Intrade is overestimating his chances and is massively underestimating McCain's chances. A savvy punter might put money on McCain to win in November, hedged with a bet on Clinton to win the Democratic nomination. You'd collect handily if either prediction turned out correct and very handily if both turned out correct. The only way to lose would be if Obama wins in November (which I'd prefer to losing a bit money anyway): truly a no-lose investment.

Also, I'd be amazed if McCain's current value (32.6%) doesn't go up once it's a two-horse race (It'll shoot up to about 50 if Hillary wins and go up to the low to mid 40s if Obama wins). So you could just buy McCain with the plan to hold and sell two months from now when I'm guessing it'll be trading at least in the low 40s.

(I should note that prediction markets are considered gambling and are illegal in most states so I'm not suggesting that anyone actually take this advice . . . )

UPDATE - shortly after I posted this the NYT posted a similar article.


Blogger Steve Peterson said...

Math says that means the prediction market puts Barack at 69.7% chance of winning given that he wins the nomination.

That means Barack plus McCain = 102.3% -- must be some way to game that system for a guaranteed win.

But I don't vote against my own preferences. For instance, let's say I win the money bet -- then every pint of the beer I'd buy would be tainted with the skunkiness of defeat, and surely produce a monstrous hangover.

7:12 PM  
Blogger Nicholas said...

ooh, tempting, if i didn't have to sign up for a new site i'd take a swing at your strategy of backing mccain and laying at a subsequent point.

my dad had a bet on the presidential elections six months ago... gore, at 10-1. hahahaha, he's still holding out for some sort of floor fight with gore strolling in to universal acclamation.

but he got maxine mckew at 3-1, so i guess it balances out.

3:15 AM  

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