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NYT Overstates Prediction Markets Efficacy

Posted By Barry Ritholtz On August 22, 2005 @ 12:04 pm In Markets | Comments Disabled

The NYT David Leonhardt [1] overstates the case for Prediction Markets in Monday’s paper:

"A kind of futures exchange where participants bet on real-world events,
these markets could have told somebody last fall to ignore the talk of a late
surge by John Kerry and stick with President Bush
. Based on the odds posted at
InTrade, one of the biggest exchanges, you could have correctly forecast the
presidential winner of all 50 states, and 33 of 34 Senate races." (emphasis added)

That’s simply a false statement — actually, these markets paniced and got it wrong (at least for a few hours). As we saw right after early exit polls in Florida and Ohio gave Kerry a slight edge [2], these markets actually raced to bet on that surge — Kerry Futures spiked as the Bush’s collapsed in response to exit polls. As Dan Gross so clearly elucidated [3]:

“the political futures traders freaked out and rushed to dump Bush and
buy Kerry. By 4:30 p.m. ET, IEM’s Kerry winner-takes-all contract had
risen from below 50 in the morning to more than 70. The vote-share
contracts on IEM also shifted in Kerry’s favor. TradeSports’ traders,
who had shown Bush winning for the entire campaign, suddenly bid the
Kerry election contract up to 67—meaning they thought he had a
two-thirds chance at winning. By 5:44 p.m. ET, TradeSports gave Bush
just a 39 percent chance of winning Ohio and a 43 percent chance at
winning Florida. . . "

"The furious and seemingly irrational Election Day market action stands
as evidence that the traders are more poll-followers than poll-beaters.”

As we have discussed ad nauseum [4], enthusiasm for prediction markets should be tempered with a dose of reality. They are hardly infallible, as we saw in the Jackson [5] and Purcell [6] cases, as well as Howard Dean’s Iowa Primary [7], as well as the pre-Election [8] and Election day trading frenzy. [3]

As we’ve seen, Electronic futures traders don’t so much predict political events as they do track all the various polls, efficiently synthesizing the entire spectrum of them into a coherent expectation.

As we have said too many times, one does not derive wisdom from collective ignorance; Large liquid markets are most predictive when making probablistic detemrinations about the behavior of that same crowd itself.

 

Source:
Online Bettors Find a New Love: Real Estate [1]
By DAVID LEONHARDT   
NYTimes, August 22, 2005
http://www.nytimes.com/2005/08/22/technology/22consuming.html

Bettors for Bush [3]
Daniel Gross
Slate, Wednesday, Nov. 3, 2004, at 12:15 PM PT
http://www.slate.com/id/2109137


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/08/nyt-overstates-prediction-markets-efficacy/

URLs in this post:

[1] NYT David Leonhardt: http://www.nytimes.com/2005/08/22/technology/22consuming.html?ex=1282363200&en=a3ffb3027fb8f6e6&ei=5090&partner=rssuserland&emc=rss

[2] gave Kerry a slight edge: http://www.slate.com/id/2109053/

[3] elucidated: http://www.slate.com/id/2109137

[4] ad nauseum: http://bigpicture.typepad.com/comments/2005/07/prediction_mark.html

[5] Jackson: http://bigpicture.typepad.com/comments/2005/06/the_prediction_.html

[6] Purcell: http://bigpicture.typepad.com/comments/2005/06/purcell_predict.html

[7] Howard Dean’s Iowa Primary: http://bigpicture.typepad.com/comments/2004/01/iowa_and_predec.html

[8] pre-Election: http://bigpicture.typepad.com/comments/2004/10/presidential_fu.html

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