I’m seeing increasing blogosphere references to Intrade prediction markets, so I thought I’d cruise over to intrade.com and have look. I first heard of the idea of using prediction markets in business over a decade ago from amateur economist and Business Objects co-worker Timo Elliott.
While I found the idea intriguing, Timo was way ahead of this time. In those days no “serious” business person would use anything “as random as a market” to do something important, like forecast sales. But inexplicably those same serious people were seemingly happy to have a market set a price for a share of their stock.
In any case, the whole concept was legitimized with the publication of The Wisdom of Crowds in 2004 and, seemingly overnight, using markets for predictors of all things became rather mainstream. Towards that end, businesses like Intrade appeared, allowing you to effectively buy and sell futures contracts in events, such as:
- Will the Higgs boson be observed in 2008?
- Will Obama win the presidency?
- Will there be a magnitude 9.0 earthquake this year?
- And most of all, will there be a recession in 2009?
Let’s see what Intrade has to say. On the boson, you can buy a contract that says it will be observed before the end of 2008 for only $2. (If the event happens by the date, the contract is worth $100; if it doesn’t, it expires worthless.) The price has plummeted due to the shutdown of the large Hadron collider.
On the possibility of a magnitude 9.0 earthquake striking before the end of this year, while they’re only trading for $4, I’m still selling since there have only been four magnitude 9+ quakes in the last 118 years. You can buy or sell the contracts on Intrade. If you sold these at $4, the most you can make is $4/contract when it (hopefully) expires worthless on 12/31/08. By the way, buying a contract for $4 that pays $100 if an event occurs represents 24:1 odds (remember you get your bet back), which is actually quite consistent with the history (118/4 = 29.5). But remember 5/6th of the year is already past.
Finally, on whether they’ll be a recession in 2009, that contract costs nearly $80 and will deliver $100 if it happens, implying odds of 1:4. Note, that’s not 4:1, but 1:4 — i.e., a fairly certain outcome in the minds of the betters.