Hows about them efficient prediction markets?

by Henry on March 12, 2006

I mentioned a few days ago that Paddy Power had opened a book on the race to succeed Bill Emmott as editor of the Economist, and suggested that depending on liquidity, there was a fair amount of scope for manipulating the results. I’m sorry to report that my speculations were bang on the mark.

Paddy Power, the bookmaker, has been offering odds on the new editor, to replace the departing Bill Emmott. Several punters this week started to put large sums ranging up to £500 on Ed Carr, the business and financial editor, at 6-1. The bookie yesterday suspended all bets, after even more tried to open accounts. Any of them e-mails with “theeconomist” somewhere in the address? “We haven’t seen anything quite that unsubtle. They’re more intelligent at The Economist. Mind you, when we ran a book on the editor of The [Daily] Mirror . . .”

The Economist’s journalists have always been quite keen on the predictive power of betting markets. Nice to see a few of them put their money where their mouth is. In other news on the race for the prize, I hear that Clive Crook is now a hot contender, and Chris Anderson is climbing up that long tail. Not that you’re able to bet on either of them now, but still.

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Crooked Timber » » White smoke at the _Economist_
03.22.06 at 2:13 pm

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1

Commenterlein 03.12.06 at 10:34 pm

I am not really sure whether I would call trading on inside information “manipulation”, but that’s just semantics.

Someone like Justin Wolfers and other advocates of the usefulness of prediction markets cannot really be happy about this – for prediction markets to have the most power, you want insiders to trade, as long as they don’t drive most of the liquidity providers (=know-nothings) out of the market.

2

P O'Neill 03.12.06 at 10:40 pm

The same thing happened with the betting on Time Magazine’s Person of the Year.

3

Henry 03.12.06 at 11:53 pm

Ah but the difference here is that it isn’t insider trading – as I understand the process from the FT this weekend, no-one really knows who is going to win – so much as an effort to make Carr seem like a winner b/c he has been anointed by the Plain Punters of Ireland and thus tilt the gossip (and possibly the result) in his favor. Predictive market as self-fulfilling prophecy, basically.

4

Commenterlein 03.13.06 at 12:03 am

Henry,
I didn’t even think of this possibility, it didn’t occur to me that the relevant decision makers at the Economist might care about the opinions of the Plain Punters of Ireland. Do you really think they do?

5

Seth Finkelstein 03.13.06 at 1:38 am

Henry: If someone knew who was going to win, would they say so? Or would they say “No, I don’t really know, I just put some money on him as a bit of fun, to create some buzz, help out a mate you know.”

6

derrida derider 03.13.06 at 5:03 am

Yep, Seth, you’re right – the maxim at the racetrack is “Those who know don’t say and those who say don’t know”

7

John Quiggin 03.13.06 at 7:35 pm

A win for Carr, now, would be a pretty good result for the smart money/efficient markets hypothesis. A loss, on the other hand, would support the Plain Punters of Ireland view since, presumably, failed manipulation of this kind counts against you. What happened in the Daily Mail case?

8

vivian 03.13.06 at 10:15 pm

Same thing happened in anticipation of Inspector Morse’s first name – Colin Dexter asked (rhetorically?) whether he might place a bet. Maybe he should be the next editor of the Economist.

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