We have often discussed the possible benefits of prediction markets for reducing bias. One key element that could be particularly useful is a conditional prediction market, where betting claims are based on outcomes conditional on some factor we want to evaluate. Robin recently mentioned the possible benefit from market claims on longevity or health conditional on various interventions.

Unfortunately, there are few prediction markets in the world, and fewer conditional ones, so it is hard to know how practical this institution may become. Thanks to an initiative by OB contributor Peter McCluskey, Intrade – the large, real-money prediction market – has added conditional claims based on the outcome of the U.S. Presidential elections. These may represent the first major case study of real-money conditional futures markets. So how are they doing? Here is some data and analysis.

Because of how the conditional claims are computed, we need to normalize the results by dividing the claim prices by the probability of a win for that party’s candidate. At the moment I looked (2008-07-28, 5:00 PM PDT), clicking on Politics and “2008 US Election”, and expanding “2008 Presidential Election Winner (Political Party)” I saw that the odds for a Democratic victory are 66.7-67.4. The claims are based on Democratic vs non-Democratic victories, so we will use the complementary odds of 32.6-33.3 for a non-Democratic win.

Then clicking on the left on “US Pres. Decisions” gives us the six conditional markets funded by Peter McCluskey.

Here are the claims, the prices, and the normalized values found by dividing by the corresponding Democratic and non-Democratic victory probabilities above. To compute the normalized values, I divided the lowest claim price by the highest party-victory price, and the highest claim price by the lowest party-victory price, giving the maximum range consistent with current trading prices. (Peter provides continually-updated information on current implied values as well.)

Claim | Dem price | non-Dem price | Dem norm | non-Dem norm |

Increase in US government debt (over $10 billion) | 51.2-53.7 | 34.4-36.5 | 76.0-80.5 | 105.5-109.6 |

Number of US troops in Iraq on 30 June 2010 (over 2000) | 41.3-43.8 | 32.1-34.3 | 61.3-65.7 | 96.4-105.2 |

These prices imply that the market expects that under a non-Democratic administration, we will see substantially higher government debt, as well as much higher numbers of soldiers in Iraq.

Continue reading "Intrade’s Conditional Prediction Markets" »

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