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June 29, 2012 3:00 PM InTrade and the Affordable Care Act Decision

By Jonathan Bernstein

Dave Weigel tweeted:

Fun fact: InTrade put “mandate will be overturned” at 73% yesterday. Another fun fact: InTrade is useless.

Disagree! InTradeis, the online trading exchange website in which members speculate on the outcomes of various future events, isn’t useless; it’s just that you have to use it for what it’s good for, which is putting a number on conventional and insider thinking. That’s quite useful, indeed; it just isn’t the same thing as saying that InTrade will always be good at predicting the future. For that, you need to know whether conventional wisdom and insider thinking is likely to be correct or not.

So, for example: during the GOP nomination battle, there was a ton of hype at one point about Herman Cain, and you could find plenty of examples of people saying that Cain really had a significant chance of winning. But if you look at InTrade, you find that at least according to those in that market, it was all phony hype. As opposed to the Newt Gingrich bubble, which really did involve (foolish, but still) people thinking he really might win.

Now, how accurate is InTrade at judging conventional and insider wisdom? Obviously, that’s impossible to know, but I think it holds up pretty well. In the Supreme Court example, I think in fact that the bulk of opinion from oral arguments on was that the mandate was toast. So InTrade did what it does; it’s just that even the wise guys were wrong on this one (collectively, that is).

So how do you use it? Exactly as you would use any non-numeric indication of what insiders are thinking. If there’s good reason to think that insiders know a lot, then what they predict is apt to be a good prediction. If not, not.

It’s a tool. As with all tools, be careful to use it only for what it’s design allows it to do.

[Cross-posted at A plain blog about politics]

Jonathan Bernstein is a political scientist who writes about American politics, especially the presidency, Congress, parties, and elections.

Comments

  • liam foote on June 30, 2012 1:29 PM:

    When the issue first arose InTrade had probability of the mandate being struck down in the low 70's. I thought this was high and bought a number of shares against it. Then the rate dropped for a time, rose again at the time of arguments before SCOTUS, and peaked at 77%.

    So it should have closed at the time of the ruling at $10 for each of the shares I purchased and at $0 per share for those who had bet on the decision going the other way. Unfortunately, market wording was "the individual mandate will be struck down prior to 12.31.12" InTrade sent me an e-mail to advise that I would have to wait until the end of the year to collect.

  • POed Lib on July 01, 2012 12:26 PM:

    InTrade is good at predicting public opinion and public knowledge. It is not good at predicting the actions of a single individual. Roberts made a deliberate choice - he chose to decide in the way he did to preserve the political decision, not a judicial decision. There is some evidence that the majority were going to overturn, but at the last minute, Roberts decided POLITICALLY to make the matter political.

  • knecht ruprecht on July 02, 2012 5:21 PM:

    Hold on just a minute now. The precise wording of the relevant Intrade contract is "The US Supreme Court to rule individual mandate unconstitutional before midnight ET 31 Dec 2012". Arguably the Court has already done that - the mandate is unconstitutional in the Chief Justice's opinion; it's the related-but-not-identical shared responsibility payment that passes constitutional muster. Given that the contract is trading at around 30 cents, there could be a play for a vulture investor to buy at pennies on the dollar, then litigate come January, like these guys. Or at least there would be, if Intrade were dealing in actual securities, and users could settle disputes in the courts. Neither of which condition holds. But still!