Is Intrade Really a Valuable Predictor?

Intrade is an online trading platform where participants actually place (legal) bets on the outcomes of certain events. For close to a decade political pundits have been using it as a reference to predict election outcomes. Indeed it seems to have a good record, correctly predicting the outcomes of the 2004 and 2008 presidential elections, and getting all but two states correct in 2008. Currently, Intrade gives Barack Obama a 62.4% chance to win re-election.

So is Intrade a valuable resource that can be relied upon to accurately predict election outcomes? Not in the least.

This Business Insider article sums up several of the problems with Intrade, and hits upon the point that has bugged me the most about it, namely that all it does is distill current conventional wisdom. Take, for example, that 62.4% number above. Sure that looks good for Obama, but over a week ago that number was well over 80%. In other words, as Obama’s poll numbers moved down so did confidence by Intrade investors. As Joe Weisenthal put in when discussing the Republican primary:

So why ignore InTrade? Well, basically, because all it does is distill conventional wisdom. Seriously, what good is it to know that on InTrade Mitt Romney is far ahead, and that Hermain Cain doesn’t have a chance? All you have to do is read any DC-based political pundit, and they’ll tell you the exact same thing.
And when the conventional wisdom changes, so does the market.
Rick Perry is down in the dumps on InTrade now, but back in August — when everyone was talking about how he was the frontrunner — he was the frontrunner on InTrade as well.

Weisenthal then tracks Perry’s chances on InTrade, and notes how they basically just mirror Perry’s poll numbers.

Even the 2004 and 2008 results aren’t that impressive in retrospect. When people woke up on election day 2008, did anybody really doubt that Barack Obama would win, other than people who clung to fleeting hopes of a miracle McCain victory? And in 2004, Bush’s chances were just over 50% – meaning that the market as a collective was leaning the same way as most polls which, with a few exceptions, generally gave Bush a slight edge. In fact, if you look at Intrade activity on election day itself, Bush’s chances plummeted as early exit poll leaks suggested a Kerry victory, and then rose again as actual election results came in and a Bush victory became more apparent. In other words, Intrade just reflected the polls. And while the state predictions seem impressive, again, how many states were truly up for grabs? Intrade was therefore no more useful a guide than any reasonably informed individual with access to polling data.

Some fans of Intrade like to point out that participants literally have to put their money where their mouth is. I don’t really see how this makes the platform any more valuable as an index. Bookies all over the country would be the ones fearing having their legs broken if money induced wiser gambling behavior – and Intrade is, in essence, simply a gambling platform.

Long story short, Intrade offers no more insight into how the election will play out than some cranky guy writing on a blog who can look at the Real Clear Politics average of polls (which has Romney up by 1.3 percent, incidentally). So then why do pundits insist on citing it, and why do people continue to think it has any meaningful predictive value?

8 Responses to Is Intrade Really a Valuable Predictor?

Not quite, Lancey. These enterprises are designed to even out the total payout relative to the total dollar value of bets received. Intrade and other online binary books are, by definition, simply binary pools, otherwise known as repeating parimutuel (yes, the spelling is correct) pools, with a very small number of horses, typically 2 or 3, participating in a race. There is no "vig" per se, as with a traditional betting book such as Ladbroke's. Instead, every punter is charged a fee when the wager is placed, which fee replaces the typical vig and generates the profit for the pool operator, i.e. Intrade et al.

Nothing "ideal" about it; just like the futures markets, in a 2-horse Intrade pool there are exactly the same number of bets on horse A as are on horse B. Said another way, for every buyer of the proposition that horse A will way, there is a seller of that same proposition, just as in the corn, or crude, or copper futures markets. It is the fact that some subset of the group of punters on a given proposition are more eager to wager on the success of A rather than B (and thus will willingly pay more for their wager) that creates the "favourite".

Also, Intrade and other such pool operators don't "adjust" anything, ever. The punters do that over time by bidding more or less aggressively for their favoured horse. The "adjustments" are merely changes in price, no more and no less, and differ not one whit from the "adjustments" (price changes) seen in futures markets.

A comparison to stock markets here is technically invalid because the mechanisms of the 2 mkts, binary pools and stocks, are different. These binary pools do not have market makers, specialists, or their equivalent. Why? Because they don't need them. Intrade et al., while desiring as many wagers as possible, do not (ever?) employ people to entice the punters to wager by putting up a narrow(er) bid/offer spread, which, along with stabilising a market, are the functions of typical market makers.

As political indicators, though, Intrade and other such pools are -- as one poster has already noted -- utterly unreliable because their small size makes them VERY manipulable. Who on FR would have any doubt whatever that, if voter sentiment might be changed favourably with the expenditure of VERY few dollars, the Zerobama people would spend such a small sum in a New York taxicab minute?

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Donald R. McClarey says:

Thursday, October 11, 2012 A.D. at 2:56pm

Intrade is a paean to the common wisdom as blaired through the media. It is as predictive as most straight line projections: not very.

Blackadder says:

Thursday, October 11, 2012 A.D. at 3:11pm

The question to ask is not whether Intrade is accurate, but whether it is more accurate than the alternatives. I just finished Nate Silver’s new book. In one of the early chapters he looks at the accuracy of predictions made by TV pundits. In most cases a pundit’s predictions turn out to be less accurate than random guessing. Intrade isn’t perfect, but the reality is that it’s a lot more accurate than that.

Paul D. says:

Thursday, October 11, 2012 A.D. at 3:44pm

After the election results are in it will be interesting to analyze why it provided relatively good or relatively bad predictive results for this particular case.

Darwin says:

Thursday, October 11, 2012 A.D. at 3:46pm

Certainly, it’s basically distilled conventional wisdom, but when you’re dealing with moderately knowable events (or “given the way things are going” kind of predictions) it might be very slightly better than just looking at the polling data.

So, for instance, on the question of prediction the presidential election: Right now the polls show Romney ahead, though there needs to be a little more state polling post debate before it’s clear whether he’s ahead enough in the right places to win the electoral college. InTrade still has Obama as the favorite, though by much less than before. If I was told to make the most conservative bet possible with a large amount of money, I might put the odds about where InTrade is right now. My reasoning would be that the Obama campaign has been fairly ruthlessly efficient at staying on top of things throughout the campaign, while the Romney campaign has been prone to unforced errors. Current polls suggest Romney slightly ahead, and a certainly hope that that’s because Romney has finally shattered the characterization of him that Obama has been running against so successfully. But if I really, really had to place money right now (and defend it to others rather than just pleasing myself) I’d probably put it on the assumption that Obama would edge ahead in a close election through constant negativity and Romney’s occasional errors and lackluster campaigning.