Obama prices as markets near conclusion

Two more days 'till uncertainty, such as it is, is resolved in the US Presidential markets.

Currently, Obama contracts are trading at $0.886 at the Iowa Election Market, $0.8895 at InTrade, $0.901 at BetFair, and $0.9137 at iPredict. Justin Wolfers over at the Freakonomics Blog notes that the favorite-longshot bias suggests that Obama's true chances are slightly higher than that. On the whole, prediction markets do a fantastic job of predicting outcomes. Draw a 45 degree line on a graph whose axes are "probability of event as expressed by prices" and "frequency with which event happens", and observations track the line pretty well. Except that prices of low-probability events tend to lie above the 45 degree line and those of high-probability events tend to lie below the 45 degree line. Longshots (McCain) tend to be overpriced while favorites (Obama) tend to be underpriced. So we have some reason to expect that Obama's true chances are somewhat higher than the prices in the various markets, and McCain's true chances are somewhat lower.

One proferred reason for this bias is that exchanges charge fees, so investing $9.50 in hopes of getting $10 doesn't make much sense if you're going to have to net fees out of the earnings. If that were the case, we'd expect Obama prices on BetFair and InTrade to be lower than those on either the IEM or iPredict as neither of the latter charge fees. But, the IEM has the lowest Obama prices going.

I'd expect Obama's chances to be much closer to 95% than 90%, and have started building position in that contract. Wolfers agrees in a Wall Street Journal column. I'd previously divested most of my position, seeing that iPredict's prices were a decent way above the prices in the other markets. Thinking more on favorite-longshot bias has me heading back in.

In other news, Foreign Policy has a nice article on prediction markets. Enjoy!