Papal Betting Update

by Daniel on April 15, 2005

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.

{ 3 trackbacks } - notes » Betting Markets
04.17.05 at 2:27 pm
Rage on Omnipotent » Blog Archive » Papal Betting Update
04.18.05 at 10:47 am
RoyalTS » Blog Archive » Pontifex Futures
04.19.05 at 11:09 am



P ONeill 04.15.05 at 4:25 pm

The Paddy Power market is afflicted by er.. parochial interest. I don’t think that a market that didn’t have a disproportionate number of Irish punters would be quoting any odds (even at 100 to 1) on two bishops i.e. non-cardinals, for Pope: John Magee and Diarmuid Martin.


DonBoy 04.15.05 at 5:55 pm

Paddy Power also (at the start) had long odds on a character from the sitcom Father Ted; which odds they had to shorten, because too many people were betting on him. Which means they were concerned about the chance that a sitcom character would become Pope.



John Quiggin 04.15.05 at 6:46 pm

Tierney’s article even quoted the Nigerian arbitrage without noticing it, IIRC. Such is my implicit faith in the EMH that I lazily assumed:
(i) there are no other Nigerian cardinals
(ii) the spread would wipe out the arb

Fortunately, DD and XL are here to do the hard yards


abb1 04.16.05 at 5:50 am

Can I bet on Papal with Paypal?


Tim Worstall 04.16.05 at 6:36 am

And one of the joys of this sort of analysis is that it is in itself making the prediction markets more efficient by pointing out that arbitrage opportunities.


jamie 04.16.05 at 10:53 am

Never mind who’s going to be Pope. there’s a big push on to get JPII nominated to sainthood, among the elect. To get there, he needs two authenticated miracles to his credit.

What we really want to is a spread on what his first miracle is going to involve. Heal the sick? Restore the blind to sight? get the lame tap dancing?

Me, I can’t wait.


nick 04.16.05 at 5:24 pm

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.

A possible explanation: I stuck a fiver on Carlo Martini at 25/1, courtesy of the wonderfully-named Paddy Power, and saw his odds shorten to around 5/1 over the past week. He’s considered an outsider, but there appears to be a lot of money headed his way.


nick 04.16.05 at 5:30 pm

Also, there’s no named market on Cardinal Martini at Intrade — at least there wasn’t when I last looked, a couple of days back — which absolutely goes with the other inter-market inconsistencies.

(Paddy Power attracts those betting on St Malachy’s ‘glory of the olive prophecy? Perhaps.)


Daniel 04.16.05 at 7:17 pm

I have always thought that “Paddy Power” would have been a great name for a resistance movement for the London Irish in the 1950s.


digamma 04.17.05 at 10:58 am

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

If it’s anything like Tradesports, transaction costs would probably eat your gains there.


digamma 04.17.05 at 12:05 pm

I looked it up. There’s generally a buying cost of 4 cents at purchase and another one at expiry. That’s basically the same as Tradesports. Therefore, when I see a nominal asking price of 5.3, 6.1 is its true cost. Likewise a bidding price of 6.0 should be viewed as 5.2 by shrewd investors.

So in your Lustiger example, if you bought Lustiger and sold l’homme generique, your total gain if he won would be 93.9 – 96.8 = -2.9, and if he lost you’d make -6.1 + 5.2 = -0.9, a loss either way. No arbitrage opportunity here.

In your Arinze example, you’re effectively buying Nigeria at 10.4 and selling Arinze at 8.8 . If Arinze or a non-Nigerian wins, you’re out 1.6, so that bet is not without risk.

Your italian portfolio wouldn’t cost 20.5, it’d cost 20.5 + (0.8 * 6) = 25.3, and you’d be selling Italy for 34.2, meaning your Italian outsider
would only be sold for 8.9 – but this is still the most interesting deal you found.

None of this should be construed as a defense of Tierney.


jet 04.18.05 at 11:48 am

And here I was about to sink my savings into these arbitrages.

Comments on this entry are closed.