Friday, August 25, 2006

Winner’s Curse

For those familiar with this site should know quite well about the recent gambling bill that was passed by the US House of Representatives. Now it goes to the Senate which leads us to the '>gambling bill contract in tradesports. The contract is currently trading in the $15-$25 range. My question is does this price reflect the true probability of the outcome of this event? I feel there is a winner’s curse at play here, when the winner of the contract is left with something less valuable then they anticipated. The recent developments of the Betonsports website are a startling one. To quote from the article:

“In a statement issued to the London Stock Exchange, BetonSports said it hoped to refund balances to U.S. gamblers and to pay some salaries of employees in Costa Rica and Antigua, where the company's offshore operations are located.

Those payments, however, "will depend upon the company's ability to persuade banks and cash processors to release its funds."

Granted this is a different situation then if the gambling act was approved by the Senate. In that case tradesports’ assets presumably would not be frozen as it appears as though betonsports has. None the less this creates uncertainly. A quick quote from the pit many weeks ago when this was a hot topic (I saved it and changed the names since I never asked for their permission)

Person 1: I doubt it will pass, yet it has an effect, I have far less in here than times past
Person 2: true..whatever i have here...if it's gone so be it...
Person 2: of course my far less is prob a lot less than
Person 1: at one point had some decent change in here, a bit hesitant right now
Person 1: it's all relaitve 2, to each his own

So not only is the prospect of this contract driving some liquidity away from tradesports, it distorts the gambling contract price. Who wants to “win” a contract that brings assets that may or may not be usable? Just to set the record straight, if this bill does in fact pass we should get a check in the mail for the reminder of our balance. But anyone who tells you it does not create perceived uncertainty has not examined the issue.

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