There’s an interesting essay in the June issue of Wired magazine about prediction markets (Prediction Markets Are Hot, But Here’s Why They Can Be So Wrong). Unlike every other story that I have read about these markets, which typically appear to have been written by their own marketing departments, this story takes the Mickey of them citing Hillary Clinton’s thrashing of Barack Obama in the New Hampshire Democratic primary as its example. If you recall, Obama was favored to win the state by 91%, but Clinton squeaked by, winning all nine of the state’s pledged delegates.
The author, John McQuaid, makes several salient points about how the political markets could have been so far removed from reality. Because the rewards are small, he says they tend to attract few participants, and those who do participate tend to be personally interested in the outcome rather than monetarily motivated. They also tend to attract political junkies rather than true insiders or outsiders.
In effect, McQuaid says that because it costs almost nothing to have an opinion, you get a lot of narrow and essentially worthless opinions. And to make things worse, those opinions are more subject to groupthink. In his summation, McQuaid says that in order to be reliable, markets need to be both deep and wide, and there needs to be a payoff large enough to attract not insiders, canny speculative interest and also the know-nothing opinions backed with cash.
To see a chart of market activity for the control of the Whitehouse, click here.
Tags: election, policital markets, political futures, prediction markets
