Out of Hibernation

I think it's time to revive this blog after almost three years of hibernation. With the elections fast approaching, there's a lot of interesting activity on the prediction markets. I've been looking at Intrade and the Iowa Electronic Markets (Intrade is the same exchange as Tradesports, about which I've posted before).

What interests me about these markets is the manner in which their design affects the accuracy of their predictions. The prices in one market can be inconsistent with those in another market, sometimes even on the same exchange. This sets up opportunities for arbitrage, although the gains are typically pretty small. It also means that the markets sometimes make conflicting predictions, which raises the question of which market is more accurate on average. This is where market design and participation matter.

So what's been going on recently? Well, Intrade's SENATE.GOP.2006 contract (which pays if Republicans end up with 50 or more seats) has fallen from above 80 to around 75, which means that the Dems have about a one-in-four chance of taking the senate. The decline seems to be driven by Harold Ford's momentum in Tennessee: the TN.SENATE06.DEM contact now gives Ford an even chance of winning.

Meanwhile, thanks perhaps to this, the HOUSE.GOP.2006 contract (which pays if Republicans maintain control) has tumbled too, and now gives the Dems a slightly better than even chance of taking the House.