iowa transforms the inevitable into a coin flip

obamaclinton
(prediction markets, right now)

The other big winner in Iowa on Thursday was prediction markets, as they had swung sharply for Obama and Huckabee shortly after the caucuses began and well before CNN was presenting the races as anything other than up in the air. I have drunk the Kool-Aid on them so much that I basically can’t abide listening to professional prognosticative political analysis anymore, or at least if I do, I’m evaluating the analyst by how well what s/he is saying accords with the market prediction. Prediction markets are like a “No Spin Zone” that’s really so. Anyway, sometime during the night, Obama passed Clinton and now is rated by the market as slightly more likely to be the nominee. Clinton had an advantage of 30-some percentage points a week ago.

If Obama gains and Clinton loses another half percentage point, betting on him versus her will almost match exactly the chances for betting “boy” versus “girl” for parents having a newborn.

Author: jeremy

I am the Ethel and John Lindgren Professor of Sociology and a Faculty Fellow in the Institute for Policy Research at Northwestern University.

6 thoughts on “iowa transforms the inevitable into a coin flip”

  1. I agree that they are an aggregation of information that is out there somewhere, but they are a very smart and unspinned aggregation. I have a lot of thoughts on when prediction markets don’t work, but if I spend more time on bloggy matters today I am never going to get my courses done. Eek.

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  2. About a year ago I blogged about prediction markets vs. experts — The Wisdom of Crowds vs. The Smart Money — as it applied to sports betting (http://montclairsoci.blogspot.com/2007/01/groups-and-wisdom-iii.html).
    I came down on the side of the experts (i.e., the bookies and line-makers). If the market likes a team so much that the betting forces the bookies to move the line, bet the other way. If you had bet against line moves in the NFL this season, you’d be way ahead.

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  3. This has been studied, hasn’t it? Keep in mind that the “experts” in sports-betting are not trying to pick the outcome of the game, they are trying to set the line that will get equal money on both sides. In pari-mutuel horse racing, which I recognize involves no experts setting odds, my understanding is that it’s a documented finding that the smart money comes in late, so that the wise bet is with the direction of odds changes (Thaler talks about this in _The Winner’s Curse_).

    I didn’t realize sports betting would be the opposite. That’s a curious phenomenon.

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  4. At smaller tracks, where large bets will be noticed, yes, the smart money usually waits till the last minute. The crowd sees the late odds drop – too late for them to get in on the deal– and they boo (the wisdom of crowds becomes the anger of crowds). But at major tracks where the handle is large, even bets of several thousand won’t be noticed even five minutes before post time. Smart-money bettors also sometimes use the strategy of spreading their bets out over the course of the betting interval, so the odds drop is not so sudden.

    As for football, Saturday’s games are a good example. The Seahawks opened as a 4-point favorite. The public bet the Redskins, and the line came down to 3. The Seahawks covered easily. The crowd lost

    The Steeler game was a an example of the worst-case scenario that I mentioned in my blog. The Jaguars opened as 1 point favorites. The public bet them heavily, and by game time, the line was 3. The Jaguars won but by only two points. If you had leaned to the Jags early in the week but waited to see which team the crowd like in order to follow their “wisdom,” you’d be very unhappy. Maybe even more unhappy than us Steeler fans. What a heartbreaker.

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  5. I might also guess that there are pretty substantive differences in the content of football betting v. track betting. 1) there are many more football fans who bet, and therefore a larger proportion of those are non-experts; 2) and more people who bet football are in their heart of hearts both rational wagerers and fans, which would influence their betting, whereas proportionately fewer people actually root for a particular horse in a particular instance.

    I might be wrong on both counts. Per 2, it’d be interesting to compare high-stakes races with known horses (go Barbaro) v. football.

    Historically, one of the reasons it was so easy to make money shorting wheat futures – and especially in bucket shops – was that farmers often bet on rising prices as a bet on themselves, and Americans more generally often bet more on the optimistic view that prices would rise than the pessimistic one that they would fall.

    Anyhooo, if I was a campaign staffer with Obama sitting on $180 million camgaign dollars, I’d throw $100,000 at the betting markets in order to reinforce my inevitability, it’d be cheaper than a commercial, and it would generate lots of assumedly non-partisan positive press about my campaign..

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