Free Markets and The Movies

InTrade is a website that allows the markets to “trade” on the outcomes of everything ranging from Oscar-winners, to election winners to the weather. Prices for the outcomes range from 0 to 100, with the price going to 0 if the outcome never occurs, and the price going to a 100 if the outcome occurs. So the current price for any event is what the market believes the percent chance that the outcome will occur is. For instance, with regards to the Oscars, each nominee for each award had “shares”, and people (like you) traded on shares for each of the nominees. As Felix Salmon explains:

Immediately before the announcements were made, No Country For Old Men was trading in the low 70s for Best Picture, and the high 70s for Best Director. Javier Bardem and Daniel Day-Lewis were trading in the low 90s for Best Supporting Actor and Best Actor respectively. [link]

That means people expected that No Country had around 70% chance of winning Best Picture, and around 80% (high 70s) chance of winning Best Director. Also, the fact that people thought Bardem had a 90% chance of winning Best Supporting, and that Day-Lewis had a 90% chance of winning Best Actor, shows how effective the markets are at predicting outcomes. In fact, this accuracy of markets forecasting events is not new. From a Wall Street Journal article from December, 2007:

Experimental prediction markets were established at the University of Iowa in 1988, and they have since amassed a very impressive record, repeatedly outperforming the polls. Research by economic historians has documented betting on elections over a century ago, and the impressive forecasting record of prediction markets was also evident in the period before scientific polling was adopted. [link]

The markets even trade on events like the capture of Bin Laden and, in particular, whether he’ll be captured on March ’08 (trading as of writing this, at 2.7 cents), June ’08 (trading at 6.5 cents) or September ’08 (trading at 9.4 cents). The “stock” for seasonal snowfall in Central Park being more than 10 inches, was trading at 90 cents. Of course, the biggest betting game of them all – politics – is the biggest draw. And, as Wolfers points out in the WSJ, it has been remarkably accurate:

…in the 2004 primaries, prediction markets pointed to the disintegration of Howard Dean’s candidacy in advance of the fateful Iowa caucuses. In the 2004 presidential election, the market favorite won the Electoral College in all fifty states; in 2006 the markets also picked every Senate race. [link]

In fact, Wolfers gives a good explanation of how to interpret stock prices on InTrade:

How do these markets work? Right now, you can buy a $1 bill for 44 cents; the only catch is that you only get the $1 if Hillary Clinton is our next President. The fact that this $1 bill is selling for 44 cents tells us that “the market” believes her to have a 44% chance of winning the presidency, a number that has risen sharply as she has become more likely to win the Democratic nomination. Interestingly, prediction markets have long suggested a strong showing for Ms. Clinton, even as popular commentators had earlier dismissed her as unelectable, much as they did prior to her successful New York senate race in 2000. [link]

The above was written on Dec 31st, 2007, and following Super Tuesday it looks less and less likely that she’s going to get nominated. It might interest you to know what the markets think. As I was writing this, Obama was trading at 84.4 cents (84.4% chance of winning), Clinton was at 17.1 cents (17.1 % chance of winning) and the event of “US Economy in Recession” was trading at 63.2 cents.

If you’re interested in taking a bet with real money, take a look at the rules of how InTrade works. And finally, here’s a screenshot capture of the front page of InTrade:

InTrade.com

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