Prediction markets

9 January 2008 at 12:17 pm stevphel 2 comments

| Steve Phelan |

One of the memes rattling round the blogosphere today is the failure of prediction markets to predict Hillary Clinton’s win in New Hampshire – in fact, to radically write off her prospects after the Iowa outcome. Paul Krugman goes so far as to entitle his blog on the subject “nobody knows anything” (as opposed to Surowiecki’s wisdom of crowds).

Surowiecki argues that wise crowds need: a) diversity of opinion, b) independence, c) decentralization (i.e. local knowledge), and d) a mechanism to aggregate private judgments. Which leads me to ask: What is the missing element in prediction markets? To the degree that investors in prediction markets are receiving their information from common national media sources then it would seem that diversity, independence, and decentralization are missing.

Entry filed under: Former Guest Bloggers, Myths and Realities.

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2 Comments Add your own

1. Dirk Friedrich | 10 January 2008 at 7:04 am

In my opinion there is a lack of diversity of opionion. People who partake in prediction markets are the ones who think of themselves as informed and exercising rational judgment when voting for one candidate or the other. However, politicians who want to be successful in democracy need to appeal to emotion and instinct to recruit potential followers. In fact, those people come to cast their vote, but never intellectually scrutinize the positions of their political idols. Further, future markets don’t appeal to everyone. Of course, there is some overlap between both groups. But the difference could account for the “failure” of prediction markets. In truth they don’t fail.
2. Todd W. | 11 January 2008 at 4:41 pm

Were there prediction markets that were specifically focused on the NH primaries? For instance, Iowa Electronic Mkts is specifically a nomination market, predicting the final outcome of the nomination process, not specific primary results.