Friday, January 11, 2008

Barry Ritholtz identifies imperfections in Intrade and its traders

Over at Midas Oracle, he writes:
Hence, we see more potential sources of market failure as these conditions are violated:
1) An insufficient amount of incentives;
2) A lack of diversity of ideas;
Chris Masse responds:
The rebuttal is easy:
  1. Economists Justin Wolfers and Eric Ziztwewitz wrote that, even small, compared to the financial markets, many real-money prediction markets are liquid enough to generate statistically accurate probabilistic predictions.
  2. Academic papers have shown that IEM’s predictions have been slightly better than the polls, even though their traders are unrepresentative of the general US population.
And my 2 cents in the comments:
.1. A dollar is a dollar, and the bragging rights that go with being right and winning are incentives beyond the dollar.

.2. Having a bunch of alleged right wing fanatics trading Obama v. Clinton seems irrelevant to their skewing of interparty contests.

I'd say Barry is 0-2 here. At least Intrade traders maintain a 2-0-2 advantage over Zogby in the 2008 primaries.

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