Yep, Intrade Pretty Much Missed The Palin Pick, But...

Barry Ritholtz is so sharp, but when it comes to event contracts or "prediction markets" like Intrade, he seems to have blinders on. Today he takes on Intrade's failure to accurately predict the Republican Veep nominee. Yep, up until yesterday it was all Romney. Then last night Pawlenty soared. And it wasn't until Sarah Palin was all but confirmed by the news media that her "stock" started to soar. True: Intrade didn't predict anything.

But if Intrade was so "wrong" and so consistently wrong, then why isn't Barry Ritholtz an avid participant in these markets. Seriously, he should be making a downright killing, cleaning up on these know-nothing traders.

The problem is that Intrade isn't "wrong" and it's not a prediction market, a point that Eddy at CrossingWallStreet has made several times. The site (and others like it) put a price on the information that's out there. Right now, the site is basically a gambling site, but theoretically this could be useful if it were more liquid and totally legal in the US.

Intrade is what it is. But it's not what it isn't: an oracle. For that, you'd probably need to consult a crystal ball. But the notion of putitng a price on information is an important function of markets, and these sites do that just fine, especially given the limitations. Again, if they didn't, Ritholtz and others would be fools not to be crushing on them.

Comments

[Barry Ritholtz]

We don't really disagree all that much.

Many people put far too much faith in these markets, and that is what I am pushing back against.

As tot he long shot paying off -- that's why weatherman and (smart) forecasters always couch their terms in statistical probabilities. Its not they were wrong, mind you, the long shot paid off.

A serious question: How can we verify how statistically accurate these markets are? Or is every "wrong" selection merely the long shot paying off?

Were these really longshots?
• Iowa Primary 2004 (Howard Dean)
• 2006 GOP Senate Retention
• New Hampshire Primary 2008
• Michael Jackson Trial
• Morgan Stanley CEO Purcell resignation

I think the long shot explanation is too glib. Instead, look to see where there is

1) An insufficient amount of incentives;
2) A lack of diversity of ideas;

I have little doubt that it was the latter in the case of the GOP VP

[Will Slade]

The best thing about prediction markets is that they put a number on uncertainty. It's not an exact number, but if it's a big sample, it's probably robust.

That means that sometimes, everybody is wrong. And that's just life.

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