Wednesday, May 21, 2008

The Market in Everything

I think Obama will win the Democratic primary and the presidency. I think we are not and will not go into a recession. I don't think any European Union member nation will announce an official boycott of the 2008 Olympics in Beijing. On what evidence did I make these predictions? Other than my own personal assumptions, I used, an online prediction market. Intrade works just like the stock market, only instead of investing in companies, you bet on your ability to guess the outcome of current events.

It works by creating contracts between bidders on various topics from entertainment, politics, and even weather. For example, there is currently a category called "Mike Huckabee to be the Republican VP Nominee in 2008." If you think Mike will be selected, you buy stock in that outcome. If you then change your mind, you sell the stock. As more and different information is revealed, the value of investing in Huckabee fluctuates with it. When the nominee is chosen and the result is official, if Mike Huckabee gets the nomination that contract will close at 100. If on the other hand he fails to get it, the contract will close at 0. You win or lose real money, so talk is not cheap.

One major problem I have read about on this site is that the deposits are in non-interest-bearing cash. So if I put $100 on Huckabee and I break even, I have actually lost money (because I could have put that money somewhere else and earned some interest or return on investment). For this reason, the expected rate of return is negative, which limits the amount of profit and therefore restricts people from really putting their money where their mouth is. Having a similar effect, laws against gambling also restrict the amount of people can make in these information markets. Here is an article that discusses how this potential research tool is hindered by unnecessary government restrictions.

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