Over betting markets as a whole, it's hard to distinguish 'manipulation' from simple 'overconfidence' by a certain side.
The difference between InTrade and Betfair over long periods is the large mystery... though given the lags/fees in getting money in, and the fact the markets aren't that large -- so maximum profits aren't very high -- seem likely to be part of the answer.
There's a reasonable Robin-Hansonian-case to be made that attempts at prediction-market manipulation improve market accuracy over the long term, by increasing the rewards to those taking sides against the manipulator.
The author brings up some good points about the potential for arbitrage between prediction markets. But in my experience, intrade has a strong conservative bias. This is more likely a case of people betting on their (incorrect) political convictions as opposed to intentional manipulation.
I remember observing a similar thing around the betting on the supreme court healthcare decision. The odds were 3-4 points more against the legislation on intrade than they were on other sites. The comments were overwhelmingly partisan and conservative. "The Supreme Court will find this unconstitutional because Obama is a socialist."
The idea behind prediction markets is that people will only bet when they know something that the rest of us don't. But we shouldn't underestimate the human ability to convince ourselves that everyone else feels as strongly about an issue as we do.
In addition to what you're saying, it could have made sense to buy Obama calls, so to speak, if you think your taxes are going to go up significantly under his second term. That behavior would severely distort Intrade's purpose as a prediction market.
It doesn't distort its utility for the people who are hedging (on the one side) or speculating (on the other), and those are the actual clients of the prediction market.
But it does make it less useful for third party observers :)
Hedgers are giving money away (on average) in order to hedge against undesirable outcomes.
If speculators respond to incentives and take their money, markets will be pushed back to normal. I think Robin Hanson even has a paper or two proving this is the equilibrium strategy. As the article indicates, he even put his money where his mouth is.
Markets are by in large not NEARLY as rational as conservative economists make them out to be. Your point about the political biases informing the positions that traders were taking further supports that.
Your use of the word 'conservative' is ill-advised, both technically and rhetorically. Free-market Economics is rooted in [l]iberal traditions in the first instance, not conservative (see: repeal of the corn laws)[1]; and in the second: Modern [L]iberals (ie, interventionists) require near-perfect rationality as an operating behavioural assumption, ex-ante. Not to be pedantic, but this is an important point. [L]iberal economists are part of the Orthodoxy. Non-orthodox behavioural assumptions[1] are (arguably) quite problematic to an Orthodox interventionist. This is glossed over because it threatens the 'myth of expertise' that is required to politically implement a such an ideology. This is not a partisian point, but one of history and terminology.
For rhetorical/conversational purposes current usage is more important than historical derivation, and the current political reality is that the "market liberal" position is espoused almost exclusively by those in the "conservative" (i.e. social conservative) camp - blame the two-party US system.
Surely the liberal interventionist position requires an assumption of irrational behaviour from market participants - that's the only way e.g. regulation to prevent bubbles would make sense.
You appear to be arguing that because (1) the historical foundations of free-market economics come from a group different from the one now called "conservative", and (2) the people now called "liberal" also make overoptimistic assumptions about people's rationality, it's wrong to say that (3) the people boosting markets like Intrade as reliable information sources tend to be the ones now called "conservative".
But there is no contradiction of any sort between (1,2) and (3).
Which is maybe just as well, because in fact (3) is true.
(It seems to me that (1) is an interesting but irrelevant historical point, and (2) is merely irrelevant smoke-blowing, whose best explanation is that you're more partisan than you let on here. But I could be wrong.)
If you throw out strong-form rationality, why would you believe someone has (a) a perfect model; (b) knows when the 'perfect' is missing; and (c) can fix it back to perfect? Empirical evidence of 'imperfection' should not lead you to conclude 'this is stupid, i am smart'. In this regard, and others, there are pretty big differences in worldview between the Nobel prize winners of 2008 and 2009. [1] And what happened in-between? The financial crisis. Is that a co-incidence? Probably not.
The main point of this thread -- about the price of X being one thing or another -- does not (appear to) need a critique of rationality to explain, however. In that regards, it is superflous. Whether this price is 'belief' or 'manipulation' (ie, strategy), the market would be needing to evidence preferences <accurately> for the prefernces to be revealed. Manipulation in this sense is a variation of strategic preferencing.[2] Again, this is a notion more consistent with <hyper rationality> than its opposite. Whether or not Market A and Market B have the same price is also simply explained by lack of common market participants. A textbook 'inefficiency' may result, but again this is not anywhere near a critique of rationality, proper.
Lastly, thinking orthogonally to the orthodoxy is not 'conservative' its actually 'liberal' but this requires omission of capital letters [3] and some sense of history to understand. Which is the larger point about rhetoric. And closer to my personal worldview.
One could look at the state-by-state markets in the weeks leading up and see if the probability predicted differed greatly from the main market. It would be far trickier to manipulate the markets state by state in such a way that their probable outcomes aligned with the probable outcome of the national markets.
I just looked at the InTrade state numbers from 11/2 (which I have on a spreadsheet) and running a few dozen simulations I was getting Obama winning about 80%. That's a pretty significant difference from where the national numbers were on 11/2 (I think about 66% maybe?)
Of course, if they differ it might just be because the Intrade market is imperfect, in which case it would represent a nice arbitrage strategy for the next election...
chart in first link shows large romney buyer. not sure if that's what you're looking for with "statistical smoking gun" though. a little more analysis at second link.
No it's most likely just overconfidence in the market by a few individuals.
Intrade actually checked for manipulation themselves:
"We checked this out for potential manipulation - it certainly fit the pattern at first glance.
However, during the period you reference above 40 individuals bought Romney shares and no individual bought more than 15% of the shares traded during that period. A look at those 40 accounts shows nothing suspicious.
So we don't believe this was manipulation but more a run on Romney when the market was unusually thin."
However, even without this spike the Intrade market was misaligned for more than 24 hours. A few of our arbitrage customers made huge amounts of money (outside our software) trading 5-10% arbs between Intrade and Matchbook. This is extremely uncommon.
Disclaimer: I'm one of the developers behind sports arbitrage software RebelBetting (http://www.rebelbetting.com)
My friend and I also did some 'arbitrage', we almost didn't do it because we were sure we had something wrong, I mean, aren't markets supposed to be efficient? We even made a program that calculated optimal amounts and alerted us when the odds were aligned to a particular criteria taking into account exctraction fees, exchange rates, commission and stuff.
Our only explanation was that betfair (our other side) was mostly European while Intrade was mostly American so it is possible that lots of Intrade betters were buying into the media's attempt to try to make the race a lot closer than it was while the Europeans were not so biased. I don't know but it is a simpler explanation than someone purposely losing money because they think influencing a prediction market would affect the actual outcome?
To a certain extent. Largely because of people doing arbitrage. So, if all arbitrageurs called it quits because they thought markets are automatically efficient, well, they wouldn't be.
An economist and a non-economist are walking down the street when the non-economist notices something on the ground and says, "hey there's a $10 bill!" The economist replies, "Impossible. If there was a $10 bill on the ground, someone would have picked it up already."
On my summer holiday this year I was walking along Hadrian's Wall & looked down to see a £5 note being blown along the path by the wind. Picked it up & was instantly reminded of this joke :)
One thing you have to watch out for on Intrade-Betfair arbitrage is the not insignificant risk of not doing the trades you think you're doing. I know Intrade has rules that various events will cause trades to be stopped and completed trades will be undone. Betfair might as well, but the two markets don't have any synchronization on when or why.
Since you'll constantly have many times what you expect to gain in a day at risk on the markets, a single rollback event could put you very deep in the red.
If a prediction market is famous enough to affect an election, it will generally cost more than $1 million to manipulate. I doubt that voter turnout would have increased if Intrade had predicted a Romney win -- too few Americans know what Intrade even is.
I'm sure all political reporters know what Intrade is. If you were going to spend money to move the market, those are the people you're most trying to influence.
I'm still personally skeptical of the whole manipulation theory, however. It's probably just a combination of too many conservatives buying with their heart instead of their head, and too few active arbitrageurs taking them to the cleaners.
One Intrade commenter from London claimed he was set up to earn about $20,000 in arbitrage against Betfair. If you expect the manipulation to continue over a period of time (which I certainly did, and wished I could register on other betting sites), it's worth it to deposit larger sums of money with bank transfers despite the wait.
At one point I wondered whether the manipulators were making large purchases once per day and whether this could explain why the different betting sites never came back in line with each other. In that case, a savvy arbitrageur might take advantage of prices while they're at their widest differential, and then wait to buy more the next day. I thought I saw a pattern like this going for a few days in a row but it was gone by the time I felt confident enough to trade around it.
A commenter over there mentioned that a similar phenomenon was noticed during the 2008 presidential election, and quoted John Delaney (Intrade founder, now deceased):
Mr. Delaney conceded there had been erratic behavior - including spikes in the direction of Mr. McCain and away from Barack Obama "by up to 10 points." And he said "trading that caused the unusual price movements and discrepancies was principally due to a single 'institutional' member on Intrade."
But, after interviewing members of the institution involved and tracking its trades, Mr. Delaney wrote in an e-mail message on Saturday: "I do not believe based on our investigations and over seven years' experience in such matters that the trading on Intrade was designed or motivated to artificially inflate McCain’s chance of winning."
could this be hedging against a romney win? for example, if you're an investor in green tech, then intrader shares in romney would be a way to protect yourself.
31 comments
[ 3.8 ms ] story [ 88.5 ms ] threadThe difference between InTrade and Betfair over long periods is the large mystery... though given the lags/fees in getting money in, and the fact the markets aren't that large -- so maximum profits aren't very high -- seem likely to be part of the answer.
There's a reasonable Robin-Hansonian-case to be made that attempts at prediction-market manipulation improve market accuracy over the long term, by increasing the rewards to those taking sides against the manipulator.
I remember observing a similar thing around the betting on the supreme court healthcare decision. The odds were 3-4 points more against the legislation on intrade than they were on other sites. The comments were overwhelmingly partisan and conservative. "The Supreme Court will find this unconstitutional because Obama is a socialist."
The idea behind prediction markets is that people will only bet when they know something that the rest of us don't. But we shouldn't underestimate the human ability to convince ourselves that everyone else feels as strongly about an issue as we do.
That's just a nice side effect of a sufficiently liquid market.
But it does make it less useful for third party observers :)
If speculators respond to incentives and take their money, markets will be pushed back to normal. I think Robin Hanson even has a paper or two proving this is the equilibrium strategy. As the article indicates, he even put his money where his mouth is.
______________
[1] http://en.wikipedia.org/wiki/Corn_Laws.
[2] In particular, bounded rationality and opportunism.
edits: clarity
Surely the liberal interventionist position requires an assumption of irrational behaviour from market participants - that's the only way e.g. regulation to prevent bubbles would make sense.
But there is no contradiction of any sort between (1,2) and (3).
Which is maybe just as well, because in fact (3) is true.
(It seems to me that (1) is an interesting but irrelevant historical point, and (2) is merely irrelevant smoke-blowing, whose best explanation is that you're more partisan than you let on here. But I could be wrong.)
The main point of this thread -- about the price of X being one thing or another -- does not (appear to) need a critique of rationality to explain, however. In that regards, it is superflous. Whether this price is 'belief' or 'manipulation' (ie, strategy), the market would be needing to evidence preferences <accurately> for the prefernces to be revealed. Manipulation in this sense is a variation of strategic preferencing.[2] Again, this is a notion more consistent with <hyper rationality> than its opposite. Whether or not Market A and Market B have the same price is also simply explained by lack of common market participants. A textbook 'inefficiency' may result, but again this is not anywhere near a critique of rationality, proper.
Lastly, thinking orthogonally to the orthodoxy is not 'conservative' its actually 'liberal' but this requires omission of capital letters [3] and some sense of history to understand. Which is the larger point about rhetoric. And closer to my personal worldview.
_________
[1] ie, Krugman vs http://www.nytimes.com/2009/10/13/business/economy/13nobel.h...
[2] preferences are </meta> to orthdox economics, as its practised by keynesian-style interventionists and neo-liberals (er, Conservatives) alike.
[3] Liberal is now a modern brand, not a reference point of clear thinking.
I just looked at the InTrade state numbers from 11/2 (which I have on a spreadsheet) and running a few dozen simulations I was getting Obama winning about 80%. That's a pretty significant difference from where the national numbers were on 11/2 (I think about 66% maybe?)
Of course, if they differ it might just be because the Intrade market is imperfect, in which case it would represent a nice arbitrage strategy for the next election...
chart in first link shows large romney buyer. not sure if that's what you're looking for with "statistical smoking gun" though. a little more analysis at second link.
Intrade actually checked for manipulation themselves:
"We checked this out for potential manipulation - it certainly fit the pattern at first glance. However, during the period you reference above 40 individuals bought Romney shares and no individual bought more than 15% of the shares traded during that period. A look at those 40 accounts shows nothing suspicious. So we don't believe this was manipulation but more a run on Romney when the market was unusually thin."
http://www.theatlantic.com/business/archive/2012/10/should-p...
However, even without this spike the Intrade market was misaligned for more than 24 hours. A few of our arbitrage customers made huge amounts of money (outside our software) trading 5-10% arbs between Intrade and Matchbook. This is extremely uncommon.
Disclaimer: I'm one of the developers behind sports arbitrage software RebelBetting (http://www.rebelbetting.com)
Our only explanation was that betfair (our other side) was mostly European while Intrade was mostly American so it is possible that lots of Intrade betters were buying into the media's attempt to try to make the race a lot closer than it was while the Europeans were not so biased. I don't know but it is a simpler explanation than someone purposely losing money because they think influencing a prediction market would affect the actual outcome?
To a certain extent. Largely because of people doing arbitrage. So, if all arbitrageurs called it quits because they thought markets are automatically efficient, well, they wouldn't be.
Did you make much money?
An economist and a non-economist are walking down the street when the non-economist notices something on the ground and says, "hey there's a $10 bill!" The economist replies, "Impossible. If there was a $10 bill on the ground, someone would have picked it up already."
Since you'll constantly have many times what you expect to gain in a day at risk on the markets, a single rollback event could put you very deep in the red.
I wouldn't be surprised if personal biases play a bigger factor than the media.
http://fivethirtyeight.blogs.nytimes.com/2012/11/06/live-blo...
http://fivethirtyeight.blogs.nytimes.com/2012/10/24/oct-23-t...
I'm still personally skeptical of the whole manipulation theory, however. It's probably just a combination of too many conservatives buying with their heart instead of their head, and too few active arbitrageurs taking them to the cleaners.
At one point I wondered whether the manipulators were making large purchases once per day and whether this could explain why the different betting sites never came back in line with each other. In that case, a savvy arbitrageur might take advantage of prices while they're at their widest differential, and then wait to buy more the next day. I thought I saw a pattern like this going for a few days in a row but it was gone by the time I felt confident enough to trade around it.
Mr. Delaney conceded there had been erratic behavior - including spikes in the direction of Mr. McCain and away from Barack Obama "by up to 10 points." And he said "trading that caused the unusual price movements and discrepancies was principally due to a single 'institutional' member on Intrade."
But, after interviewing members of the institution involved and tracking its trades, Mr. Delaney wrote in an e-mail message on Saturday: "I do not believe based on our investigations and over seven years' experience in such matters that the trading on Intrade was designed or motivated to artificially inflate McCain’s chance of winning."
http://www.nytimes.com/2008/10/20/business/20predict.html
but i imagine the numbers are too small?