'Pathetic' Presidential Predictions
by Travis Pantin
Wed, 9 Jan 2008 at 9:03 PM
On Market Movers, a finance and economics blogger, Felix Salmon, yesterday sounded a cautionary note on the usefulness of futures prediction markets.
The markets, which some claim are better than polls at predicting the outcome of presidential elections, "are looking pretty pathetic this morning," he wrote.
After Senator Obamaıs victory in Iowa, the price of contracts linked to Mr. Obama winning the Democratic nomination shot up to $70 from around $20; over the same period, contracts for Senator Clintonıs victory plummeted to $25 from $70, according to Intrade Prediction Markets. After Mrs. Clinton's victory in New Hampshire, the candidates' prices switched again.
"We're back at the status quo ante," Mr. Salmon wrote. He offered several lessons to be learned about prediction markets from this example: "Firstly, the strategy of 'buy any favorite trading around the 70 level,' on the grounds that such trades nearly always win, is very dangerous. Secondly, prediction markets are pretty bad at working out the margin of error on polls."
On Midas Oracle, commenter Niall O'Connor wrote: "New Hampshire will go down as the Black Wednesday of prediction markets."
The editor of Midas Oracle, Chris Masse, yesterday defended prediction markets against such allegations. ³Prediction markets are forecasting tools of convenience that feed on advanced indicators. When those advanced indicators are wrong, the prediction markets are wrong," he wrote.
Mr. Masse said that "going forward, prediction market journalism should emphasize relative accuracy (as opposed to absolute accuracy)."
A professor of economics at George Mason University, Robin Hanson, also stood by prediction markets. On Overcoming Bias, he wrote: "We do not claim that prediction markets will always be more accurate that other methods. Often other institutions do pretty much the best they can. Rather, compared to other long-lived institutions which make frequently-updated probabilistic forecasts, we claim that well-traded prediction markets will in most situations rarely be much less accurate, and in some situations be much more accurate. Often other institutions are seriously broken, and do much worse than is possible."
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