My adventures on Intrade

For those who don’t follow the economics and politics literature obsessively, Intrade is a market in bets on various kinds of predictions, set up to follow the conventions of a share market. As I’ve discussed quite a few times in the past, the efficient financial markets hypothesis in its strong forms, implies that markets like this should give a better (more precisely, at least as good a) prediction of things like election outcomes than could be obtained from studying polls, pundit predictions and so on. I’ve been sceptical of this, on the basis of casual empiricism and some concerns about whether the empirical tests I’ve seen are biased in favor of the claim being tested.

One thing I haven’t done until now is to enter the actual market to see how it works. I finally signed up, and discovered a few items of interest. First, thanks (I assume) to US laws against online gambling, it’s quite difficult for Americans to participate in the market, which is, at least for legal purposes, based in Ireland. You can’t use a US credit or debit card, and my attempts at a wire transfer from my US bank account failed. Australia has no such restrictions.

Second, and relatedly, the market is quite thin. If the managers of Presidential campaigns cared what Intrade said, they could shift the markets a long way for a very modest outlay. For example, shares in Ron Paul, with a $10.00 payoff if we wins the Repub nomination, are currently trading at 0.27, implying a 2.7 per cent chance. But a Paul fan who wanted to raise his estimated chances could push them up to 0.40 for an outlay of $1000 (there are about 3000 shares for sale at prices between 0.27 and 0.40).

Third, there’s no margin trading, which means in particular, that you need a lot of collateral to go short on a long-odds candidate (at least if I have worked out the system right). Selling short costs $10 a share, less the current price, so if I wanted to sell short $100 worth of Paul shares at the current price (that is about 400 shares), I’d have to put up nearly $4000. I had an elegant Dutch book worked out, betting against Paul and Huntsman (zero chance, in my view) to finance a bet against my preferred dark horse whose odds were equal to the sum of the first two. But that didn’t it work, so I had to just put down my money.  Over the fold, my trackside tip ….

Newt Gingrich: I bought my shares early this week, and am already ahead to the tune of $15.00. My reasoning is as follows. Even if he survives the harassment scandal (which looks less likely now than when I entered the market), Herman Cain isn’t a viable candidate. Perry and the other conservative candidates are already toast. So, Romney is the obvious favorite and is indeed odds-on to win.

But, as Eugene Robinson just pointed out, Romney isn’t as inevitable as centrist pundits think – on the contrary he’s quite “evitable”. There’s a large pool of conservative Repubs who would rather vote for (just about) anyone else*. Once Cain is out of the picture, Gingrich is the last choice left to them. And given their willingness to defend Cain, it will be that much easier to forgive Gingrich’s personal baggage, now long in the past.

A majority of Repubs will probably hold their noses and vote for Romney as long as he appears to be the only electable option. But if things turn up for Obama, or if the (entirely accurate) perception that Romney is the emptiest of empty suits, a haircut masquerading as a man, starts to take hold in the mainstream media narrative, that calculus might change. At that point, the conservative narrative might recast this election as a replay of 1964, a necessary defeat on the way to a greater victory. 

There’s plenty of “ifs” in there, but I still think Gingrich was badly underpriced when I bought at 5.0 per cent, and still underpriced at 7.5 per cent.  A quick look around the wingnut blogs (not an experience to be repeated often, so I won’t give links) suggests quite a few of them are thinking the same way.

Coming back to Intrade, what, if anything does all this prove. My guess is that, most of the time, betting markets display what’s called “semi-strong’ efficiency, that is, the market odds are about as good as you would get from a skilled analyst with access to published polls and the public predictions of other skilled analysts. By definition that has to be at least as good as any mechanical calculation based solely on poll numbers, so the markets should outperform the polls. On the other hand, the markets are thin and may be prone to panics or bubbles at times. And of course , if there were no polls, the markets and the pundits would be relying entirely on guesswork.


* The exceptions, for different reasons are Huntsman and Paul.

Posted via email from John’s posterous

20 thoughts on “My adventures on Intrade

  1. Any tips for the election in November, JQ? My money is still on Romney to take the nomination (by a hair) and then win the November election quite comfortably. Any other nominee, and it’s at least a ball game. But I think Obama is in more trouble than even the CW would suggest.

  2. I don’t have any skin in the game (because of the required sunk cost) but some pair-trades using the “more liquid” items seem rather safe. Like long “Newt winning the GOP nomination” and short “Newt winning the Presidency” to hedge. Easy money.

  3. I think despite Romney’s ‘evitability’ he’ll take the nomination (given the various deficiencies of the other GOP nominees) and then get beaten – not thrashed, but beaten – by an electorate that will implicitly recognise the similarities of Obama and Romney’s policies in practice (Business Party military-industrial with a slightly enlightened character). Obama’s charisma and – sigh – soaring rhetoric will get him over the line.

  4. The Intrade ‘market’ is a pure exchange market experiment with controlled parameters regarding the possible pay-offs at specified date event pairs. While short-selling is allowed, bankruptcy within ‘the system’ is excluded.

    The exchange market experiment, referenced by Geoff Well, has interestingly a parameter restriction on the initial wealth distribution [$5, $500].

    As far as I can tell, both experimental markets follow the logic of a Radner-type exchange economy (no production, no ‘growth’).

    It seems to me these experiments may one day provide helpful insights into why actual financial markets don’t work as nicely.

  5. The idea that such experiments and Radner-type models can provide useful insights into markets avoids the real work that needs to be developed.

    Academics miss the point when they construct models that do little more than provide short-term extrapolations but only after they have been calibrated with recent data.

    They have never been able to predict turning points in leading indicators, with a useful time frame, and the relative errors for parameters like GDP, CPI, are huge.

    As Jim Stanford argues: Modern neoclassical thinkers have tried to prove mathematically that general equilibrium is possible; they have failed repeatedly, and today general equilibrium theory has fallen out of favour with many academic economists …. (etc) [Stanford, J., Economics for Everyone pg56].

    At base – the mathematical fantasy ignores the role of politics in economics. It may be possible to construct a model of incomes and consumption on a isolated island like an aircraft carrier where there is little or no political distortion – but no where else.

    Pretending that Intrade serves any use in this context only fosters a continuing infatuation with arcane algebra instead of analysis.

  6. I liked the wingnut comment JQ, and the scary thing is that most of them will have guns.

    What a God awful mess. A mess to the extent that there could very well be a pestilence due to sort it all out, and as with most pestilences it is the “God Fearing” who are usually the most blind sided to such eventualities.

    One very suitable pestilence would be for the 99% to all actually vote, in which case all bets would be off.

  7. Chris Warren, with due respect, your argument is misguided. Taking your statement about Jim Stanford at face value (ie I assume your ascribed statement is true), I must say that it is false. There is a difference between finding conditions on a theoretical model of an economy under which a state of this economy, defined as ‘an equilibrium’, is ‘proved to exist’ in the logic of mathematics and your statement. You’ve missed already one of the insights, namely that the initial wealth distribution matters. IMHO, ‘general equilibrium theory’ has fallen out of favour among many economists for a different reason to what you suggest. IMHO, a major reason is that the theory of incomplete markets (same methodology) has bothered all those who relied on handwaving support for ‘efficient markets’ supported with a lot of rhetoric and argument; a methodology which relies on vigorous assertion. Finally, if you have one set of questions which you consider as overriding all else, then I suggest it is up to you to find a solution.

  8. @BilB

    with the reports of what looks like voter suppression do you think they will be able to vote?

    the picture from here,also,is that the act of voting is such a god-awful pain in the arse (hours waiting in queues,challenges to the right to vote,difficulties in getting on the electoral role,misleading phone calls,pre vote misinformation on where to vote and policies and intentions of the candidates,anomalies in the counting procedure,etc)that actually getting people to place their ballot and have those ballots accurately counted are problematic to say the least.


    an accurate count of the will of every voting age citizen of USA would surely be an eye opener.

  9. @Ernestine Gross

    ‘Hand-waving’ seems to have done a lot of people proud! In the ‘Rhetorical School’, they may not know much about economics, but they know what they like. That also, seems to be the philosophy the Republicans and the Tea Party live by.

  10. The idea that betting markets provide direct access to some kind of distilled truth has to be yet another modern fairy tale, wishful hubris based in human fascination with invisible forces and agents, actually quite psychologically similar to some zombie economic ideas. We can of course be thankful that faith in betting markets is many orders of magnitude less dangerous – so far.

    I haven’t seen an answer to the obvious question – what’s the mechanism? – that rated much above homoeopathy.

  11. @Jim Birch

    The value of the information gained from a betting market might not be distilled truth, but it is reasonable to believe that information from people who are willing to put money where their mouth is, might be more valuable than information gained from others who are simply shooting the breeze. In principle, the accuracy of predictions should testable (and probably has been tested). Anyone got some good references?

  12. @Freelander

    Not sure the word philosophy should be used in relation to the Tea Party and the neo-cons. But maybe I am a bit old fashioned in this respect.

  13. @Jim Birch

    You ask: ” whatโ€™s the mechanism?” Well, the ‘mechanism’ is the the aggregation of individual’s expectations about the likelihood of a specified future event (event pair) happening or not by means of individuals using a measurable quantity (monetary bets) to express their beliefs.

  14. @Ernestine Gross
    Sure, but individual’s beliefs are subject to all kinds of regular biases. I agree that people who are willing to bet real money are likely to take more care than your average front bar expert and people who regularly loose money are more likely to drop out of the game. This gets you down to a better class of predictor, dollar averaged, but nothing magically infallible. These guys are still running cognitive systems with a slew of biases that optimised survival in the Pleistocene, like herd instinct and a propensity for belief in invisible agents.

    If you gathered wisdom-of-crowd factoids and stupidity-of-crowd factoids to measure the relative size of the piles, should you expect selection bias? ๐Ÿ™‚

  15. @Ernestine Gross

    That is an arguable position, but I would expect the Stanford critique to be independent of such concerns as “initial wealth distribution”.

    My solution is to identify and deal with the politics that, I suggest, determines economics beyond the point that economics facilitates politics.

    Mathematically you can always prove a equilibrium exists, if you assume the initial circumstances are stable, then apply any mixing transformative model you like (with no new inputs or exits), then you are guaranteed to have a equally stable output with different numbers. You can then paste the label “Equilibrium”.

    The over-riding question is the long-run (6 decades) tendency for increasing OECD macro-economic instability which does not exist in models. A subsidiary question here is: which models (equatoins) included the exponential growth in debt we have experienced for decades?

    The symptomatic question concerns the inability to predict turning points in leading indicators (until it is too late).

    You cannot have a model if you do not understand the economy as it is in society.

    Practically every model I have followed over time has funked, for example: ABS Cat 1350.0 which the ABS noted “we have observed a deterioration in its predictive performance.”

    EPAC models were just as distressed and were easily countered when the opposite conclusions were produced at points when the AMWU commissioned their own econometric modelling.

    There must have been about 1,000 of models and variations on models over the last few decades. How many survived?

  16. @Jim Birch

    “These guys are still running cognitive systems with a slew of biases that optimised survival in the Pleistocene, like herd instinct and a propensity for belief in invisible”

    How do I know that it is the members of a sample of people who are ‘tested’ for ‘bias’ and not the members of the research team who are biased?

    If ‘these guys are still running cognitive systems with a slew of biases that optimised survival in Pleistocene…’, then, presumably, you and I are doing the same. How would you prove otherwise?

  17. Ernestine@13 – well, people describe the Marquis de Sade’s work as philosophy…

    (Note though that the good Marquis’ protagonists direct harm toward the other, rather than insisting with determined idiocy on going down with their victims.)

  18. @Ernestine Gross
    Science has a number of strategies to minimise the impact of biases, like, noticing them and taking them into account. This is a significant improvement but it won’t provide absolute certainty. If you need that, I’m sorry, but you’ll have to try the church down the road. ๐Ÿ™‚

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