Prediction Markets

Tag: Prediction Markets

Tuesday’s Big Winner — Nate Silver

Going into yesterday’s election, the prediction markets had President as a 2:1 favorite to win a second term, and the New York Times‘ Nate Silver put the odds at more like 9:1.  Silver is rather up front about his methodology (though it does contain some “secret sauce”), and he posts predictions for every single state in the union.  Indeed, he predicted a 332 electoral votes, with Florida going to Obama with a raz0r-thin margin — Silver gave the president a 50.3% chance of carrying the state.

As it stands, President Obama has secured 303 electoral votes, with the allocation of the 29 Florida votes too close to call. As of this writing, the count has it every-so-slightly in Obama’s favor.

If it goes Obama’s way, Silver will have nailed the election; if it goes Romeny’s way, InTrade will have nailed the election.


There was some controversy about Silver’s methodology, and some conservative commentators thought he was telling the Democrats what they wanted to hear.  Well, the proof of the puddin is in the eating, as the saying goes (or would go if it hadn’t been hopelessly garbled).

See here for a whole lot of other election predictions that weren’t as good as Mr. Silver’s.

UPDATE: Florida goes to Obama / Silver.  Bow down.

InTrade Market Manipulation Fail

Though the recent presidential election polls show a virtual dead heat, the prediction markets (particularly InTrade) have consistently shown President Obama with a decisive 3:2 advantage or better.  The 3:2 advantage for Obama amounts to paying $0.60 to win $1, which is (loosely) interpreted as a 60% chance of winning — though it’s not really a probability. In contrast, you can buy Romney shares at around $0.40 to win $1.

Yesterday, however, some heavy money came flooding in on Romney, temporarily pushing the Romeny price / odds closer to $0.50.  This spike was short lived, however, and the price soon settled back down to the $0.40 range.

Was it an attempt to manipulate the market? And if so, who would do such a thing? Derek Thompson at The Atlantic talks with prediction-market guru Justin Wolfers:

At around 9:57am this morning, I noticed something funny happening on InTrade: Obama’s stock was tanking, and this was happening in the absence of any concrete political news… Romney’s stock shot up from 41 to 48 in a matter of minutes (suggesting that his chances of winning the election had risen from 41% to 48%).

Notice though that the effect disappeared very quickly. The Obama Flash Crash disappeared nearly as quickly as it appeared.

Two conclusions follow. First, you can manipulate prediction markets fairly easily. But second, you won’t get much bang for your buck.

This made news in about a dozen wonky blogs, so it appears that prediction markets are here to stay.

Those of you who don’t know what I’m talking about might start by checking our previous posts on prediction markets for some background.

I should mention that since that time the Romney price / odds have been rising a bit, to about $0.45;  I knew I should have bought at $0.25.  I could have cashed in.

Incidentally, InTrade has a state-by-state breakdown based on its current market prices, showing Obama with a razor-thin lead.  At current prices (Oct 24 at noon), if Wisconsin flipped, it would be an electoral college tie.  Zoinks.

Some argue that the prediction markets simply follow the polls.  I guess we’ll see.

Prediction Markets v. Polls, Cont.

This coming Tuesday in Wisconsin is the Republican Senate primary to replace retiring Senator Herb Kohl.  The race is quite hotly contested by former governor Tommy Thompson, Madison banker Eric Hovde, and former state representative Mark Neumann.

The latest poll is out, with Thompson enjoying a rather chunky lead at 28% to Hovde’s 20% and Neumann’s 18%.

As of 6 p.m. today, however, InTrade tells a much different story. And that story is that Hovde is up (a 40% chance of winning), followed by Neumann (35%) and then Thompson (32%). Huh.

So, who are you going to believe?

A couple of things to notice here.  First, yes, I know the InTrade odds add up to more than 100%.  Second, earlier this week, InTrade had Hovde with a commanding lead of 70% or so.  Oh, and a third thing, Tommy Thompson can do more pushups than any of the junior professors in the department.

More on this later.

UPDATE:  The prediction market now has Thompson as the odds-on favorite.

A Second Update: Thompson wins.

Is Walker a Slight or a Heavy Favorite to Win the Wisconsin Recall?

Who are you going to believe?

Case 1:  According to the latest polls, “Gov. Walker Holds Slim Lead in Wisconsin, But with only one day to go the recall election appears far from decided…. Two new polls, released Sunday, have the governor out in front by a handful of percentage points, although in both surveys his lead is within the margin of error.”

Case 2: According to the “prediction market,” InTrade: Wisconsin Gov. Scott Walker to win the 5 June 2012 recall election 93.2% CHANCE.

I’ll have much more to say about prediction markets later this summer as we head into the general election, but suffice it to say that these markets tend to be more accurate than pollsters at predicting elections.  From a Journal of Economic Perspectives piece by Justin Wolfers:

In the political domain, Berg, Forsythe, Nelson and Reitz (2001) summarize the evidence from the Iowa Electronic Markets, documenting that the market has both yielded very accurate predictions and also outperformed large scale polling organizations… (and) the accuracy of the market prediction improves as information is revealed and absorbed as the election draws closer.

That is taken a bit out of context and is comparing national polls to certain political markets, but if it was my money, I’d bet on the market.   That is, right now the polls are running between a coin toss (50-50) and a slight advantage for Walker, perhaps 3:2.  In contrast, the prediction market has Walker at about a 15:1 favorite at this point.  So, to put this in perspective, suppose someone is tossing a coin and you believe it to be a fair coin.  You can lay a $9 on heads to win $10 or $1 on tails to win $10. Which side would you bet?

In calling this one early, it would seem the credibility of prediction markets on Briggs 2nd is now riding in the balance.