Prediction markets and Democratic carnage

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Prediction markets predict non-financial outcomes, such as terrorist attacks, political events, and elections. They are based on “futures,” or contracts whereby one party agrees to pay the other party a certain quantity of money if a specified event happens. It’s basically interactive gambling on world events.

The University of Iowa has set up a market to predict United States presidential election outcomes. Go put your money down and try your luck.

You can infer probabilities of real occurrences based on the market prices of these contracts, and I love checking on the latest market quotes. I could watch hours of mind-numbingly boring CNN and decide how the Dems and Republicans are doing, or I could just check the market. It’s like polling the audience on Who Wants to be a Millionaire – people in groups tend to be accurate.

So what does the market say? We’ve all read that the Democrats are squandering their election chances with bickering and negative politics, and that McCain has grown stronger as a consequence. The market agrees. The implied probability of Democratic victory in the October election (whoever the nominee may be) has decreased significantly over the past several months:

 

The 8% slide from 64% to 56% doesn’t seem like much, but it is actually quite large given the importance of this event.

At 56%, the Democrats still have a good chance for the White House. In case you were wondering, Obama currently has 79% chance to get the nomination over Clinton, which was basically not moved by the PA primary.

Do these prices seem right to you? Would you buy the Dems at 56% odds? How about Obama as the Nominee at 79%?

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One Response to “Prediction markets and Democratic carnage”

  1. Santi Says:

    Sam – I highly recommend you take a look at Erickson’s (Columbia U.) papers on this subject. Pretty interesting stuff.
    Re: your post, I would disagree with your take on the utility of prediction markets. Actually, I would agree with you on how prediction markets are a great way to know what’s the status of the race at “any given time.” However, I would dispute the notion that prediction markets (at least nowadays) are an effective prediction tool. Just take a look at the price chart for Barack Obama since Jan 08.
    Much love,
    -Santi

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