I just noted a Larry Ribstein post that relies on the predictive power of markets; a sentiment seemingly shared by Steve Verdon:
Check out the Iowa market's graph. Remember these markets tend to have somewhat better predictive power than standard political polls. These people are looking at the polls plus additional information that we are seeing in the news. Further, this information in aggregated over a large number of individuals so it is likely the "aggregate information set" is larger than your typical person taking a poll.
You can see the same thing over at TradeSports.com as well. Bush is now around 0.69 and Kerry is continuing his long slow decline to 0.20. Right now the momentum is with Bush and it shows no sign of changing.
But then there's this post by Michael Stastny at Marginal Revolution:
On TradeSports a contract of George Bush in the winner-take-all market is currently selling for around $7. But what does this actually mean? Most traders and researchers would argue that 0.7 is the current "market probability" that the event "George Bush wins the 2004 presidential election" occurs. But this answer drives Charles Manski, an economist who recently also published an article in the September issue of Econometrica, crazy.
He says that under not-so-far-fetched assumptions, the price of a contract reveals nothing about the dispersion of traders' beliefs and partially identifies the central tendency of beliefs. A President.GWBush2004 contract trading at 70 reveals that 70 percent of traders believe the probability of the event "George Bush wins the 2004 presidential election" to be larger than 0.7. The mean subjective probability of this event lies somewhere in the open interval (0.49, 0.91) (price/mean belief region).
Candid admission time. I tried reading Manski's paper, but he's dealing in a level of statistical analysis that's way above my pay grade. And, frankly, I'm having a hard time even parsing Stastny's explanation. (Hey, I went into law precisely because I stunk at numbers. You're looking at a guy who got a C in Calculus and a D+ in Differential Equations.) So can somebody please explain, in simple English, exactly what prediction markets tell us? Try emulating what economic historian Deirdre McCloskey (who is herself an interesting story) calls "the lawyerly rhetoric" of Nobel economics laureate Ronald Coase.
