Wednesday, February 27, 2008

Wanna Bet! Intrade

Occasionally readers send me subjects to blog about. So for Emily in Minnesota here is a post on Intrade. Intrade is a betting website. Basically you sell someone the right to ten dollars if they are correct. Most of the predictions/bets involve politics. But you can bet on where the next Olympic Games will be, if the US will go to war with North Korea, or if Bird Flu will be discovered.

So for example right now people are paying around $8.25 to win $10 if Obama is the democratic nominee. In the last week that price has gone up from $7.90. The online magazine Slate tracks the price for political candidates. What does this information tell us, well this week people think Obama as an 82.5% chance at winning the nomination up from 79% last week.

So the next question is does this tell us anything meaningful? I think the answer is sort of. The idea of this type of markets is that of Malcom Gladwell’s Blink. That large groups of people with a limited amount of information are pretty decent and a lot of times better than experts at predicting outcomes.

The problem with Intrade as Tyler Cowen at Marginal Revolution are two fold. First, the market is not big enough. By my rough estimate the size of the total shares sold is a few million dollars. As this article in the New York times suggests there sometimes is money to be made betting against unlikely candidates like Ron Paul and Al Gore. Second, you have to keep your money sitting interest free in Intrade accounts so you would lose any interest you would gain from now until the nomination or election.

But, the market seems to be popular with Economist as Greg Mankiw another economist/blogger has cited Intrade in the past.

You want a hot tip, I think good bets right now our McCain at 33% to win the presidency. Really I think democrat or republican is closer to 50/50. And bet against S&P 500 to close above 1750, because if that happens I’ll be hedged with my investments.

But if I knew I was right wouldn’t I bet on it?

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