Larry Ribstein on Prediction Markets

Hear, hear:

The pollsters are calling a dead heat in Indiana. Should you even be interested? The pollsters haven’t done so well in calling past primaries. Gordon Crovitz discusses a better idea in today’s WSJ:

We think of forecasting stock-market performance and presidential outcomes as entirely different exercises. When stocks are assessed for future earnings, we don't look to opinion polls to define their price. Why shouldn't active, anonymous trading on politics, backed by money, work just as well in setting the odds of a political outcome? * * *In contrast, polls depend on getting a representative sample, truthful responses to poll questions, and proper use of statistics. Election-predicting markets seem to work so long as there are enough traders whose aggregate information is fully reflected in bets. * * *Iowa Electronic Markets claims that its results have been more accurate 75% of the time versus some 1,000 opinion polls since the early 1990s.

The problem is that regulations, primarily those against gambling, stunt these markets. The Iowa prediction market operates under a CFTC no action letter that limits bets, and still gets threats from state attorneys general, as Tom Bell writes. For a handy summary of the legal state of play, see Michael Abramowicz’s Predictocracy, 49-53.

And even if you think that prediction markets are like gambling, that doesn't necessarily justify regulating them. As Steve Levitt argues:

To me, there is no difference between a “prediction” market and a “gambling” market. If there is demand for people who either want financial risk surrounding an event or want to hedge risk, why should the government get in the way? It doesn’t matter whether it’s the value of a bond, a share of stock, a presidential election, a firm’s likelihood of hitting its quarterly numbers, or the chances that the White Sox will win the pennant. In general I am not much of a libertarian, but our government’s policy towards gambling is completely idiotic and rife with internal contradictions.

Maybe all this thinking will gain some traction. Then in future elections we may come to see as rather quaint the idea of getting information by asking people to give anonymous opinions about candidates, with no penalty or constraint on lying.

Here are the Intrade v. Zogby standings:

Wins	Losses	Ties	Pct	Contender	Avg Eve Prob
6	3	10	57.9%	Intrade	69.6%
3	6	10	42.1%	Zogby	40.2%

And the schedule (Zogby data much more limited than Intrade):

Score	Date		State	Party	Intrade	Zogby	Winner		Intrade Pct	Zogby Pct
6-3-10	22-Apr		PA	Dem	Clinton	Clinton	Clinton		82%	47%
6-3-9	4-Mar		OH	Dem	Clinton	2-way-tie	Clinton		70%	45%
5-3-9	4-Mar		TX	Dem	Obama	2-way-tie	Clinton		57%	44%
5-2-9	5-Feb		NJ	Rep	McCain	McCain	McCain		96%	52%
5-2-8	5-Feb		NJ	Dem	Clinton	2-way-tie	Clinton		67%	43%
4-2-8	5-Feb		NY	Rep	McCain	McCain	McCain		98%	53%
4-2-7	5-Feb		GA	Dem	Obama	Obama	Obama		96%	48%
4-2-6	5-Feb		MO	Dem	Obama	Obama	Obama		63%	47%
4-2-5	5-Feb		CA	Rep	McCain	Romney	McCain		56%	40%
3-2-5	5-Feb		CA	Dem	Obama	Obama	Clinton		52%	46%
3-2-4	29-Jan		FL	Rep	McCain	2-way-tie	McCain		51%	33%
2-2-4	26-Jan		SC	Dem	Obama	Obama	Obama		90%	38%
2-2-3	19-Jan		SC	Rep	McCain	McCain	McCain		56%	29%
2-2-2	19-Jan		NV	Dem	Obama	Clinton	Clinton		54%	42%
2-1-2	15-Jan		MI	Rep	McCain	2-way tie	Romney		54%	27%
2-0-2	8-Jan		NH	Dem	Obama	Obama	Clinton		91%	39%
2-0-1	8-Jan		NH	Rep	McCain	McCain	McCain		82%	34%
2-0-0	3-Jan		IA	Dem	Obama	3-way tie	Obama		54%	28%
1-0-0	3-Jan		IA	Rep	Huckabee	2-way tie	Huckabee		53%	28%