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October 24, 2007


Small number of bets by non-profit maxizers. Ron Paul (and Gore too) are both so unlikely to be nominated that it might not be worth the time of disinterested profit seekers to bother betting against a win.

Is the win if nominated its own betting market, or is just calculated based on the other two?

Josh, by "the implied" I meant to say the third column is calculated from the other two.

Whoops. Should have read more carefully. Sorry.

If a bettor thinks Gore's probability of a win is actually closer to 4%, what can he do? Certainly he can unload his Gore-win futures (or whatever they're called) at the current too-high price, but what can he do beyond that that will have the effect of further depressing the price? In a financial market there is more that he can do, such as sell short, but can he do that here? Limitations on what bettors can do might prevent the prices from moving to the extremes that they should move to.

As for Ron Paul - one reason to rate his conditional-win probability higher is that he may have better appeal to Democrats. If he's running against Hillary (the probable nominee), he might have the anti-war Democrats in the bag, in addition to the Republican voters. Something that can't be said for the other Republicans, at least not to that degree.

Why not put your money on it? Do you have any reasons other than illegality and the resulting inconvenience?

Also, Constant, there are two parties on every contract on inTrade. You can sell a contract short as long as someone is willing to buy it from you. The way one sells short on inTrade is much more reasonable than in financial markets, where you have to pay interest, avoid margin calls, and so on.

This is so off the mark, almost every figure is off by 15-20 points...

As for Ron Paul - one reason to rate his conditional-win probability higher is that he may have better appeal to Democrats. If he's running against Hillary (the probable nominee), he might have the anti-war Democrats in the bag, in addition to the Republican voters. Something that can't be said for the other Republicans, at least not to that degree.

Not to that *degree*? As an anti-war democrat I'm having trouble seeing how any of the leading Republican contenders merit much beyond my contempt. The idea that I'd vote for anybody but Paul on the republican side even over Clinton is pretty far out. Hillary hasn't given me much reason to believe she'll be a significant improvement over GWB in the imperialist or rule of law department, but Giuliani and Thompson at least have given me reason to think they would be *worse*. Romney isn't saying much, but he's a Republican, so that doesn't bode well. Paul is a Republican, which counts against him, but he's very clearly articulating positions I favor in opposition to his party's power structure. If he actually earned the nomination, that would signal that something has changed and I might well vote for him even though he's got some really wacky planks.

In my dreams, the election is contested between Paul and Dodd, and the main political questions become the extent and character of the welfare state and governmental action to internalize externalities of pollution and such, with classical liberal positions like military non-aggression, transparency in government and the rule of law being unquestionably supported as the bedrock of our political philosophy by a big majority in both parties. Oh, for such a world.

Not to that *degree*?

I was hedging because I don't know every single Republican's platform.

"Josh, by "the implied" I meant to say the third column is calculated from the other two."

What happens if elected is 12 and nominated is 10?

These are only naive measures of the conditional probability, as David Schneider-Joseph explains here.

So, are you using this market as evidence to update your beliefs about various candidates' chances, or pointing out a situation where a market is giving bad information that you intend to ignore?

It would appear that there are divergences far enough from MY expectations, that if transaction costs were low, I'd be willing to take some of the middles (buy gore nominations and sell gore wins for instance). I presume you're in the same boat.

The question on my mind is: What good is a biased market? Many (heck, most) prediction/wagering markets are constrained in ways that bias the pricing (by allowing partisans to exert more influence than if the market were robust, by not allowing interested parties to include themselves, and likely more subtle effects). How much information can you really get from a thinly-traded market on an emotional/political topic? Put a different way, how can you measure the information efficiency of a yet-to-be-resolved set of wagers?

gore at 90% isn't all that crazy of an idea. the only way he would win the nomination is if he builds up a full head of steam and becomes the dominate force heading into the convention... this "momentum" would imply his odds to win the election are very high. if he is just a likable candidate with a middling chance of winning a general election, he won't win the primary because he is way behind in $.

if you disagree with me, trade the spread and make yourself a free lunch.

I put a close-italics tag ("lessthan,slash,letter-i,greaterthan") between the words. Seems to have done the job.

Doh! I should have viewed source the first time. In attempting to close, I left out only the slash, so I opened italics twice. In the first attempt to redeem myself, I closed one, got confused and gave up, leaving it to you to close my second. Thank you, and apologies to all. We need blogs where all comments are editable by their original authors.

Jason, these are fine measures of the conditional probability stated, but they are not measures of other conditional probabilities you might find more interesting.

Tiiba, that is time to arbitrage.

Dagon, see my added to the post.

The argument that the same sort of good news that would allow a dark horse to win the nomination would also help in the general election makes a certain amount of sense, but that doesn't seem to be what's happening here. Gore's chance of winning the primary is so low largely because he isn't running.

I don't think using a gambling site as a predictor of anything is a good idea. If gamblers are so good at predicting the future, then why are the casinos repeatedly taking in so much more money than they give out?
By the way, owners of casinos are not gamblers-- ask one.

InTrade charges a 5 cent in-the-running expiration fee, right? That makes me worry a bit about the low-odds candidates: there's no money in shorting them at current odds given the expiration fee. Correct me if I'm wrong...

A more interesting measure would be the probability a given candidate would win _if his/her nomination was forced_.

With the trade fee, the foregone interest, and the point spread, it is difficult to arbitrage these imperfections out of the Intrade market.

Sorry -- InTrade charges a 10 cent expiry fee on a $10 contract, so there's still a bit of money to be made in shorting. The fees are a high percentage of your expected earnings in shorting low probability events, but don't eat up all of it.

Hey, Intrade was way off on the economics Nobel. They did not even have any of the winners up on the board.

I've looked at these lines before, in particular the Gore one since it seems so out of whack. One problem is that when the numbers get towards one end or the other, you have to invest a lot of money for a fairly long period of time for a low predicted return.

For instance, suppose you knew that Gore was guaranteed to lose. You can sell contracts, but intrade requires that you keep enough money on hand to cover those if you lose. So you have to keep that much cash on the site in order to get a 5.3% return over a year.

Not terrible, but as the rate drops it gets less and less appetizing. So people stop selling below a certain amount unless the event is really close, and stop buying if it's over a certain amount for the same reason.

So I think you can think of intrade predictions as being bounded from 5%-95% or something as long as the event is far away.

Don't read too much into what amounts to random statistical noise. Markets tend to towards accuracy, but at any given moment, they're wildly inaccurate. As Benjamin Graham noted a long time ago: In the short-term, a market is a voting machine. In the long run, it's a weighing machine.

I was tipped off to this play, and arbitraged this (with a small amount of money) many months ago.

Note that the margin requirements are sort of crappy, you have to put up your full potential loss a few months before the event. So the shorting half of the play has a pretty significant opportunity cost.

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