My adventures on Intrade

by John Quiggin on November 5, 2011

For those who don’t follow the economics and politics literature obsessively, Intrade is a market in bets on various kinds of predictions, set up to follow the conventions of a share market. As I’ve discussed quite a few times in the past, the efficient financial markets hypothesis in its strong forms, implies that markets like this should give a better (more precisely, at least as good a) prediction of things like election outcomes than could be obtained from studying polls, pundit predictions and so on. I’ve been sceptical of this, on the basis of casual empiricism and some concerns about whether the empirical tests I’ve seen are biased in favor of the claim being tested.

One thing I haven’t done until now is to enter the actual market to see how it works. I finally signed up, and discovered a few items of interest. First, thanks (I assume) to US laws against online gambling, it’s quite difficult for Americans to participate in the market, which is, at least for legal purposes, based in Ireland. You can’t use a US credit or debit card, and my attempts at a wire transfer from my US bank account failed. Australia has no such restrictions.

Second, and relatedly, the market is quite thin. If the managers of Presidential campaigns cared what Intrade said, they could shift the markets a long way for a very modest outlay. For example, shares in Ron Paul, with a $10.00 payoff if we wins the Repub nomination, are currently trading at 0.27, implying a 2.7 per cent chance. But a Paul fan who wanted to raise his estimated chances could push them up to 0.40 for an outlay of $1000 (there are about 3000 shares for sale at prices between 0.27 and 0.40).

Third, there’s no margin trading, which means in particular, that you need a lot of collateral to go short on a long-odds candidate (at least if I have worked out the system right). Selling short costs $10 a share, less the current price, so if I wanted to sell short $100 worth of Paul shares at the current price (that is about 400 shares), I’d have to put up nearly $4000. I had an elegant Dutch book worked out, betting against Paul and Huntsman (zero chance, in my view) to finance a bet against my preferred dark horse whose odds were equal to the sum of the first two. But that didn’t it work, so I had to just put down my money.  Over the fold, my trackside tip ….

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