Trader’s Narrative

Below is the chart for the brand-new market on whether Sarah Palin’s vice-presidential nomination will be withdrawn:

You can see the complete page at intrade here.

If you think that Palin will be John McCain’s running mate, then you would sell and pocket the difference as the market settles to zero. If you think that she will be replaced, then you would buy and pocket the difference when the market goes to $1.00

So right now this market’s conviction is that there is about a 15% chance for this event. To see what I mean, check out the chart of the market for Palin’s nomination:

As the chart shows, the nomination came out of left field but those who had bought made a lot of money!

Although many call these markets “prediction” markets, they aren’t crystal balls that perfectly foretell the future. They simply reflect all available information at a specific point in time. For example, check out what they were saying during the Democratic and Republican nomination process for president.

The Iowa Electronic Market is another well-known “prediction market”. You can see the graph of the presidential race here.

I’m not following the 2008 political race in the US that closely but there is a very cool and capitalistic way to keep up to date without doing any amount of hard work.

Did you know that there are marketplaces where capitalism can be used to predict the outcome of political events?

They are similar to futures markets where a contract can be bought or sold (bid/ask) that will pay a fixed return. So for example, if you thought that Barack Obama would win the Democratic nomination, you could buy or bid on his contract. If he did win, then you would be paid the full amount of the contract (usually 100 points).

The two most popular online marketplaces are intrade.com and the Iowa Electronic Markets. If you are in the US, be careful if you want to participate in these marketplaces. Some states have laws against gambling on political events. The Iowa markets though have received special treatment from the CFTC which allows them to pay out real cash (up to $500) to US citizens.

But you don’t have to participate in these markets to gain insight. Because of the way the contracts are setup, they in effect, act as a measure of probability for an event. Or atleast, what the crowd deems to be the probablity of a future event.

So for example, the contract for Hillary Clinton on intrade gives her a 47% chance of winning the Democratic nomination:

Obama is currently in second place with a 31% chance of winning. Iowa markets are showing very similar probabilities with Hillary Clinton having 42.4% and Barack Obama 33.4%

Recently, Mike Gravel has gotten a lot of attention from the online community (digg, reddit, youtube, etc.). But he’s nowhere to be seen on the prediction markets.

On a different note, I’ve continued to add articles, books and other choice trading related resources to my box.net widget. Make sure to check it out and let me know if you have any special requests.