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.