Betting on a sure thing
Intrade is a company that hosts betting on political events, to “tap the wisdom of crowds”. Matthew Yglesias posted the graph below, which shows the difference between the Intrade betting percentage on “Barack Obama wins the presidential election” and “The Democrats win the presidential election”.
The spikes above zero could theoretically just about be rational — if Obama dies before the election, the Democrats could win without Obama winning — although a probability of even 1% of this seems too high. The spikes below zero imply that Obama wins without the Democrats winning, which really isn’t conceivable. If you bet against the Democrats winning and in favor of Obama winning (or vice versa) at the right times you could make guaranteed free money.
The problem is that Intrade is small enough that it’s not worth people with lots of money hanging on it trying to exploit minor irrationalities, even for big events like the presidential election, especially when you take transaction costs into account. Betting markets tend not to leave $20 notes lying on the table, but they can drop the occasional handful of change.
Thomas Lumley (@tslumley) is Professor of Biostatistics at the University of Auckland. His research interests include semiparametric models, survey sampling, statistical computing, foundations of statistics, and whatever methodological problems his medical collaborators come up with. He also blogs at Biased and Inefficient See all posts by Thomas Lumley »
I made a few hundred playing arbitrage across the different betting markets on the Australian election – some big price spreads. And then I almost got utterly burned where differences in contract wording meant that, in the close election, if they’d gone to a second election I could have lost across all markets. That would have sucked. Beta was larger than I’d thought, even on what looked like pure arbitrage….
12 years ago