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So your claim is that election prediction markets are silly because the open interest is much smaller than the amount being spent on political advertising?

How about my thesis: political prediction markets are on an upward growth curve due to increased public attention being paid to them. Increased attention means increased attempts at manipulation, which means increased arbitrage opportunities, which means greater open interest. Read Alex Tabarrok's post on this over at Marginal Revolution. I can tell you for a fact that except for the difficulty in quickly depositing money into a trading account at Intrade from a US address I would have become a member a couple of weeks ago when Obama wins Ohio was trading higher than Obama wins election, meaning that I could have gotten better than even money odds on the bet Obama loses Ohio & wins election versus McCain loses Ohio and wins election. If you know anything about US politics you probably realize that this is pretty much a freeroll, since no Republican has ever won a presidential election without winning Ohio...

And even if (as Intrade seems to be claiming) there was no manipulation and there was simply a large institutional investor whose time preference was higher than than the time preference of retail Intrade members (and who by implication did not care that the volume of his trades were costing him money) looking for a hedge against a Republican win, does this mean that all markets are silly because the expected forward price of an asset is not the same as its futures price (since countercyclical assets yield less than pro-cyclical assets)?

You can't take an Intrade number at face value. Duh. But the larger the market gets the less subject to manipulation it will be and the more predictive (with the caveat that people are using it for reasons other than speculation!) it will be.

You can't take an Intrade number at face value. Duh.

Um, yeah. That's kinda my point. It's like Vegas, only without the objective expertise.

Prediction markets are socially useful insofar as they:

a) Provide information
b) Provide a hedging opportunity

(b) of course detracts from (a)

If more people wish to hedge against a democratic president than against a republican one then the dem's futures numbers will be higher than his expected value. That is my point in saying you can't take the numbers at face value. The manipulation issue is separate, and should be alleviated as the markets grow.

It seems a little premature to declare prediction markets dead because they're too small to provide reliable numbers...

Is the fact that arbitrage opportunities (not true arbitrage, but close) exist just a sign that the market is not yet mature?

I'd agree that they remain something of a joke as they are too small to resist manipulation, but I think there is nothing inherent to prediction markets that makes them meaningless.

Intrade is not the only election stock market, nor the oldest, nor the largest. The interesting thing about the manipulation strategy described above is that it appeared to have created an arbitrage opportunity. Specifically, on Sept. 26th, McCain victories were trading on Intrade at 43.1/43.3 (bid/ask quotes), while over at betfair.com they were 35.7/36.0 and at IEM they were 37.0/37.4

The result is that hundreds of thousands of dollars could only produce a 7-point bulge for a brief period in an immature market.

This does not bode well for people hoping to manipulate these markets for propaganda value in future.

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