Prediction Markets Go Nuts Over Rep VP Pick

I gotta tell you, if prediction markets are any indication, nobody saw Palin coming. I was up till 5am last night watching CNN's political market and as you can see on the graph above, it was all about Pawlenty and Romney (blue and off-white lines) not only over the past week but also for most of the night, with Palin (green) picking up steam only after the first leaks started appearing on CNN around 6-7am.

Which brings up a question of how, you know, predictive prediction markets really are, at least in situations where the outcome is hinged on a private decision of a small group of people. Last night's Rep VP market was very similar to the Dem VP market last week, where bets clearly reflected the somewhat mindless absorption of the news stream. (Bayh and Kaine were leading for most of the week; prices of Clinton, Chet Edwards and Sebelius fluctuated widely on the numerous rumors. Biden emerged as a clear leader the day preceding the announcement).

Me? Last week, I doubled the initial $5000 by buying Biden at $44. This week, I shorted Pawlenty at $80, Romney at $60 (then closed it at $12 and then bought again at $29 last night -- a speculative move that was a mistake, in retrospect). Stocks of all women candidates were dirt-cheap: all but Palin were under $1 last night (I got about a hundred of Whitman, Fiorina and Hutchison); I also bought Palin at $2.57. I thought the latest stream of McCain's commercials praising Clinton could be hinting at the larger Rep VP strategy.


  1. Isn't one of the main factors in the effectiveness of prediction markets the independence of the participants? It seems that the CNN market has a fairly homogeneous participant pool, at least in terms of what information they have available, ie "mindless absorption of the news stream". Would be interesting to take a look at some of the CNN markets where there was either less voluminous or more diverse.

  2. You'd expect traders to actively and independently seek out various sources of information to guide their investment decisions, and traders with superior sources to
    force the market into the direction of the actual outcome.

    Maybe Intrade, where people bet for real money, is a different because of the much stronger incentive to make careful and more informed decisions?


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