Best Bet for Next President: Prediction Markets by Justin Wolfers
As the 2008 presidential race heats up, voters are overwhelmed by a flood of new data: Who is ahead in the polls? Who is winning the "money race"? How are the dynamics of the race likely to respond as the candidates tack left and right, advertising strategies change, and we learn whose Web site is drawing more eyeballs?
Political prediction markets provide us -- the consumers of this information -- with a way to cut through this clutter.
A prediction market is a bit like the stock market, except that you are buying shares whose value depends on the success of a political candidate, rather than the profits earned by a corporation. And just as stock prices are a useful barometer of the health of a company, so too the price of a prediction contract is a barometer of the health of a political campaign.
It is the accuracy of market-generated forecasts that led the Department of Defense to propose running prediction markets on geopolitical events. While political rhetoric about "terrorism futures" led the plug to be pulled on that particular experiment, the original insight -- that markets can help make sense of vast amounts of disparate information-- remains valid…
In a truly efficient prediction market, the price will come to reflect the influence of all available information…
Through this process of different people trading based on their own observations about the race, prediction markets prices come to aggregate disparate pieces of information into a single summary measure of the likelihood of various outcomes….
Two other characteristics also distinguish prediction markets. First, they respond to all sorts of news beyond shifts in public opinion, including changes in campaign staff, political re-positioning, and performance on the trail.
Second, prediction markets are forward-looking, while polls are often backward-looking…
more on prediction markets:
Pricing Political Risk with Prediction Markets
Prediction Markets
No comments:
Post a Comment