Papal Betting Update

Just to calm down some of the latest round of breathless boosterism about prediction markets (to be fair, the Tierney article is actually quite interesting, but breathless boosterism is what it is), I thought I’d provide my usual financial service to the CT community by putting on the green eyeshade, firing up Excel[1] and seeing if the prices are “all that”.

Surprise surprise, as is absolutely bound to be the case in a sideshow fun’n’games market with no real betting community and a complicated multiple-choice selection, they ain’t. Going over the card at Intrade turns up a few nuggets. All the phenomena I’ve noticed in prediction markets are there in force[2]:

• Pure arbitrages: In fairness, these do get cleared up from day to day, but new ones keep popping up. Yesterday, you could buy Cardinal Lustiger at 5.3 and sell “generic Frenchman” at 6.0. That’s a sure thing profit as it only loses you money if Lustiger wins, but isn’t French, and he is. That’s gone today, but a new one has shown up; you can buy Cardinal Rodriguez Maradigia at 8.0 and sell him at 8.5 in his other description as a national of Honduras; he’s the only Honduran cardinal
• Not arbs, but pretty close. If you buy Nigeria at 9.6 and sell Arinze at 9.6 then you get nothing if Arinze wins, nothing if any other non-Nigerian wins, but clean up big-time on the off-chance that (admitted outsider) Anthony Olubumni Okogje wins it.
• Weirdo implied combinations. The next pope being an Italian is quoted 35/35.8. However, in the named candidate market, the quoted cardinals are Tettamanzi (9.4/10.9), Battista Re (2.2/3.6), Sodano (0.9/2), Antonelli (1.3/1.5), Sepe (1.1/1.8), and Biffi (0.4/0.7). That means that you can buy a portfolio of these for 20.5 then sell Italy for 35, implicitly selling the chances of an Italian not on this list at 14.5. This implicit quote on “Italian outsider” seems very high; it’s second favourite after Ratzinger which seems a bit rich; there are 32 cardinals in this field, but most of them are such rank outsiders that fixed-odds bookies aren’t even quoting prices on them.
• Zero inter-market consistency. Ratzinger is apparently yer man, at the moment. But you get a much better deal buying him at 19.7 on Intrade than backing him at 3-1 with Paddy Power. Conversely, if you fancy the chances of Von Schoern of Austria, Paddy is offering 33-1, which is a better deal than buying him at 3.1 on Intrade. There’s also one genuine intermarket arb; if you sell Rodriguez Maradigia at 8 on Intrade, then put £6.66 (ooh scary) on him with Paddy Power, you lock in a £1.32 profit risk free.
• Ludicrous spreads. The “sure thing” in the named Pope market is quoted 95/112.2, in the country market 101.5/112.2 and in the region market 97.6/113.6. That’s no kind of liquidity at all. The average spread for the top five candidates is 14.1% of the midprice. Even if you’re betting that the next Pope will come from Europe (62/66.6), you’re paying a spread 7% of the mid.

It’s easy to take the mickey out of prediction markets (that’s why I do it), but there’s a serious point here. One of the many problems with these things is the simple, empirical fact that limit order books (including limit order books in-disguise like Robin Hanson’s Automated Market Maker) are really best suited to situations in which there is significant two-way trade already existing. It’s a known problem of exchange design (one with which the London Stock Exchange has wrestled over the years) that you have to be really quite careful in your design to maintain a liquid market in an open limit order book. Liquidity does not just supply itself.

My guess is that the Paddy Power odds are going to be better than the Intrade prices, firstly because the bookmaker’s decision on what risk to take is a sensible filter for some of the weirder artefacts of the market prices, and secondly because it’s the nearest equivalent to an order-driven market in Papal futures. It’s not going to be easy to test this, but if Battista Re is the Pope, then that’s a definite win for Paddy Power; they are laying him at 8-1 compared to Intrade laying him at 44-1 (2.2/3.6). If Rogriguez Maradigia wins, then score one for the markets, as detailed in the arbitrage above. Otherwise, it looks much of a muchness; if an outsider wins, then that might indicate a defeat for the markets since they’re in general offering much more generous odds on these (apart from the “Italian dark horse”) detailed above. Happy punting.

[1]No fuck off. Excel is the spreadsheet program of champions, endorsed by no fewer than five winners of the “Financial Analyst of the Year” winners. And it now has a front end for Win Bugs, so all you R boys can ge stuffed. One day Microsoft will include a module to make histograms that aren’t openly laughed at in the street and we will conquer the world!
[2]These prices are, in fairness, moving all the time, so these particular trades might not be there when you look, but I checked twice and they were.