As the election heats up, politics wonks who want a little more statistical meat than just poll numbers turn to InTrade to get the betting odds various candidates.
InTrade is an Ireland-based event/prediction market that works like this: There are various binary questions that are asked, such as “WILL HERMAN CAIN BE THE GOP NOMINEE?” or “WILL ISRAEL DROP A BOMB ON IRAN BEFORE DECEMBER 31, 2012?”.
Each contract expires at $10 (if the answer turns out to be YES) or $0 if the answer turns out to be no.
So if you think that Herman Cain is going to be the nominee, then you can buy one Herman Cain contract for $0.42, and make nearly 25x on your money if it expires at $10.
Right now, as you can see, the “market” isn’t very bullish on Cain’s chances, and it seems the bettors on the site are fully on board team Romney, whose contract is trading over $7, meaning you have pretty limited upside at this point.
Got it? OK.
Now the reason people like InTrade is that people are putting money where their mouths are (always popular) and it combines the wisdom of crowds (also a super-trendy concept, though perhaps a bit less so post-2008 crash, when the un-wisdom of crowds became the new hot meme). There have been a number of economists/academics (like Robin Hanson) who think that prediction markets of various stripes hold great promise in garnering information that could be valuable.
So why ignore InTrade? Well, basically, because all it does is distill conventional wisdom. Seriously, what good is it to know that on InTrade Mitt Romney is far ahead, and that Hermain Cain doesn’t have a chance? All you have to do is read any DC-based political pundit, and they’ll tell you the exact same thing.
And when the conventional wisdom changes, so does the market.
Rick Perry is down in the dumps on InTrade now, but back in August — when everyone was talking about how he was the frontrunner — he was the frontrunner on InTrade as well.
Here’s a look at the lifetime of Rick Perry’s contract:
Basically his contract was nowhere until people started talking about him entering the race, then it jumped as it became more likely he would enter, then it surged when the polls had him winning, and then it collapsed when his poll support collapsed, and all the politicos wrote him off. There’s nothing predictive or insightful in here
And that’s exactly why you should ignore InTrade this year: Because by looking at it you might think you’re getting fresh insight into the data or more information somehow, but what you’re really getting is a different way of seeing the same mainstream groupthink that you could get anywhere else. That’s very dangerous.
Where InTrade could be very useful is on non-politics contracts, like whether the US or Israel wil bomb Iran, which currently indicates an 18% chance of a bombing before the end of the year.
Because the conventional wisdom on something like this is so hard to come by (you don’t hear people making solid predictions on this left and right like in the presidential election) it could be a useful tool for figuring out what people “in the know” actually think. Unfortunately in this case, the volume is so light (in part thanks to the fact that it’s very hard for people in the US to get money into the site due to gambling restrictions) that you want to tread very carefully.
So we’re all for betting markets on all kinds of things, especially when they combine speculators and smart money and everyone else.
But this election season recognise that when you’re looking at InTrade, you’re not getting some additional insight: Just the same conventional wisdom that thought Rick Perry was going to win, that thought Newt was dead in the water this summer, and that barely even heard of Herman Cain a few months ago.
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