Is there manipulation in the Hillary Clinton prediction market?

Both Eric Zitzewitz and I have recently noticed some suspicious activity in the InTrade market for whether Hillary Clinton will be elected President, with someone bidding up her odds from about 25 to around 40 (currently hovering at 38).  This just strikes as us too high, relative to her chances of even garnering the nomination (around 51).  And when we saw this mis-pricing, we suggested that manipulation may be at play (see Eric here; my comments here; Robin Hanson here; and Greg Mankiw here).

But Koleman Strumpf isn’t so sure that this is manipulation. Koleman’s main evidence is that the law of one price appears to (roughly) hold across markets, and so the 2008.PRES.CLINTON security is similarly priced on BetFair, and elsewhere.  Of course, this isn’t evidence against manipulation, but it is interesting.  He raised the real possibility that this is a rational market response to some recent developments, although for the life of me, I can’t figure out what development that may be.

At the heart of Koleman’s concern is a question about the burden of proof here. And I have some sympathy for the view that when a market price moves in a direction you don’t expect, one should change one’s expectations, not one’s view of prediction markets.

So here is a simple way to resolve the issue of the burden of proof…  If the current market price is a reflection of available information, then as future information comes in, the market price is as likely to rise as to fall.  So I want to offer Koleman the following bet: If the price of 2008.PRES.CLINTON is higher than 38.3 (the last traded price on Intrade) on June 30, 2007, then I’ll buy him his favorite cigars. And if it is lower, I’ll be waiting for a good bottle of Aussie red.

Of course, we would want to make sure that this friendly wager is, itself, manipulation-proof.  So I’ll suggest we use the volume-weighted average trading price on June 30 to resolve the bet, and not simply the last 11:59pm trade.

So Koleman, do we have a bet? 

And more generally, do we have a useful mechanism for resolving scientific disputes?

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  • http://jamesdmiller.blogspot.com/ James D. Miller

    You wrote “If the current market price is a reflection of available information, then as future information comes in, the market price is as likely to rise as to fall.” I don’t think this is true. Consider a very simple example:

    Say next week the race will be decided and Hillary will be either at 100 or 0, and the market estimates that there is a 60% chance it will be 100. The market price today will be 60, but there is a 60% chance (not a 50% chance) that the price will rise.

  • http://www.nber.org/~jwolfers Justin Wolfers

    James: Your comment is definitely correct, but it is hard to see its relevance for a market price that is “pretty close” to 50, and for a horizon lasting only until June 30.

  • http://jamesdmiller.blogspot.com/ James D. Miller

    Justin,

    You might be right, but the point of my comment was that the market price reflecting all available information doesn’t imply an equal chance of the price increasing or decreasing. Is there some other reason to expect that the price has an equal chance of going up or down in the Hillary market?

  • http://www.universityupdate.com/politicians/hillary_rodham_clinton/2988986.aspx?src=blog University Update

    Is there manipulation in the Hillary Clinton prediction market?

  • Nathan

    This bet is seriously flawed, because it is not true that “If the current market price is a reflection of available information, then as future information comes in, the market price is as likely to rise as to fall.” It’s true that the expected value of the future price is the current price, but it’s absolutely false that there is necessarily a 50% chance the price will rise and a 50% chance it will fall.

    To take an extremely simplified example, suppose I sell ten lottery tickets, and on June 30th I will randomly select one, and pay its owner $10. Now leaving aside unimportant complications, the market value of each of these tickets now is $1, and there’s a 90% chance a ticket will fall in value on the 30th. So by your test this market is being manipulated, when clearly it is not.

    In the real world, it is also almost always true there is not a 50% chance of a company’s share price rising or falling. Imagine a stock in a speculative biotech start-up. In the long run, there is a high probability the price will fall; most start-ups fail. The current price is fair because of the small chance of a massive payoff. On the other hand, I expect the reverse is true for most established companies — there is a high likelihood of modest growth and a small risk you’ve invested in the next Parmalat.

    To relate to the specific example, one plausible view of Hillary is she is in such a dominate position she will win the Democratic nomination, and then the presidency, unless something goes unexpectedly wrong. If this is right, one would expect her price to gradually rise as each moment where nothing goes drastically wrong for her passes, with a smaller chance of a large drop. So, on this view, there is a greater than 50% chance her price will rise in a month.

    Even if the price is artificially high now because of market manipulation, that doesn’t necessarily mean it is likely to be higher or lower in a month. If the manipulation continues, then the price will depend on the whims of the manipulator, about which we currently know nothing, so your bet would prove nothing.

    So really, the only way the outcome of your bet would be correlated with the prediction you are trying to test is if (1) there is market manipulated, and (2) the manipulation ends and the price returns to its competative level before the bet ends. Even in this case, there will be significant uncertainty, as Hillary’s competative price might rise by more that the amount of the manipulation.

  • Martin

    I have two questions.

    1) Has anyone in the field considered the utility of a Hofstadterian meta-market that analyzes the utility of other markets?

    2) Out of curiosity, is there a prediction market for the existence of God?

  • Stuart Armstrong

    40 (currently hovering at 38). This just strikes as us too high, relative to her chances of even garnering the nomination (around 51).

    Greg Mankiw’s blog discusses a possible arbitrage opportunity, but the respondents seem pretty certain that transaction costs will wipe out that arbitrage. If the arbitrage opportunity is so small, I’d hesitate to proclaim “manipulation”.

    How resilient are prediction markets in general to self reinforcing manipulation? (i.e. I manipulate the bet to make it seem more likelely that Hilary wins; since people follow the markets, it becomes more likely that Hillary wins, hence my manipulation may not involve financial losses for me).