Question about InTrade

RIght now futures for Obama winning the presidency are trading at around $65. Does that mean that, were I a time traveler with knowledge of the outcome of the election, in a little over a month I would be guaranteed a profit of $35 (or a 53% gain) for each share I purchased?

Each point listed is worth ten cents. So if you bought one contract at 65 and sold it at 100, there’s a difference of 35 points, or a profit of $3.50. You would pay five cents commission to buy the contract and five cents to sell it, so your profit would really be $3.40 per contract.

Of course, if you buy a contract at 65 and Obama loses, you’d be out $6.70, once the commission is included.

So the dollar values in my original post were off, but one would still stand to reap a 53% return?

Yes, minus commissions. I’m on Intrade all the time. Check out the senate pages for better deals than that. You can grab something like 7% for betting Texas will go red and like 15% for Iowa=blue.

What’s more interesting is that you can buy Obama on Intrade and sell him on the Iowa markets for a guaranteed profit. The only way that would lose would be if Obama won the popular vote (so you lose on Iowa) but lost the presidency (so you lose on Intrade).

Assuming Obama wins, which is not a sure thing. Also note that, if you’re planning on buying and holding until after the election, 65% isn’t quite a high enough probability to make this a positive expectation bet, even before you take commissions into consideration.

It’s not really a guaranteed profit if there’s an outcome where you lose money. But yes, InTrade is highly inefficient, to the point where you have good odds to make money if you’re willing to dig a bit.

My understanding is that InTrade and other prediction markets are highly efficient. If I’m wrong, I’d appreciate any materials someone could pass along.

How do you figure? If it’s selling at 65% and you think he has a 66% chance of winning, shouldn’t you buy it? That’s assuming, of course, that you think you’re spot on. If I thought there was variance, but it was somewhere between 75% and 85%, I’d buy it. What math are you doing?

This is not so unlikely actually. I seem to recall it happened recently. Oh yes, that’s how Bush first got in.

Right now I’d think Obama is very very likely to win the popular vote and a bit less likely to win the electoral vote. McCain has a comparative advantage in winning the electoral vote as he’s likely to win a large number of small states with disproportionate number of electoral votes. Recall that the electoral vote for each state = number of representatives (which is roughly proportional to population) + 2.

See here for one recent example.

Invest a dollar at 65%. You have a 65% chance of making $.35 and a 65% chance of losing 1. Ergo, your expected outcome is losing .1225. Again, this is completely dependent on the assumption that you buy and hold until after the election, and ignores the transaction fee, which is not in your favor either.

I could say a hell of a lot about Intrade, as this often gets me riled up. I occasionally look at various contracts that Intrade offers on various international issues which I have knowledge of due to my employment, and simply laugh. Far from tapping the collective knowledge of smart investors, these contracts have a strong propensity to being run by the desperate wagers of headline chasing dilettantes.

Here are some criticisms of Intrade:
http://bigpicture.typepad.com/comments/2008/01/prediction-mark.html


Then I suppose you’re laughing all the way to the bank?

No. I’ve never put money on it and never will. I get a paycheck, and I think it would be at the very least unprofessional, probably unethical, and possibly illegal for me to seek profit on Intrade for the knowledge I gain through my profession.

Even if I didn’t have that concern, I think the business structure of Intrade is a ripoff, as the commissions seem outrageously high to me, compared to the fees I pay for buying stocks online. If I were to spend $5,000 buying a mutual fund on etrade, I’d pay what, like $15 for the privilege? If I invested the same money on Intrade, depending on the value of the contract, I’d easily be paying hundreds of dollars, if my math is correct.

Ah, I see your error. You don’t invest a dollar, you invest $.65 (well, $6.50 for a shot at $10 actually). You’ve got a 65% chance of gaining .35 and a 35% of losing .65. So it comes out even. If you thought it was a 66/34 chance in reality, you’d profit over the long run. That’s not counting commissions but you can factor that in too.