By Dave Anderson:
I am at best a believer in the weakest form of the mostly, sort of, kind-of eventually efficient market hypothesis --- namely that Stein's law is in effect and that sooner or later, valuations will roughly reflect reality but day to day price fluctuations are mainly noise. Strong believers in efficient markets have to either be drunk or handwave repeated bubbles that are dependent on the greater idiot fallacy (sooner or later, every idiot is already in the market). I don't place a whole lot of faith in betting markets to provide significantly new or unique insight because they assume a strong efficient market hypothesis.
Political Wire highlights two of the prominent political betting markets that are asking a high salience political question. Will the Democrats lose their majorities in 2010? This is not an obscure question, so we should assume consistent arbitrage would lead to convergence.
With less than a year until the 2010 midterm elections, let's see how
traders are betting with their wallets in the political futures
markets: Intrade and the Iowa Electronic Markets.
The probability -- using last price of Friday's contract in percentage
terms -- that Republicans will take control of the House of
Representatives:
Intrade: 33.0%
IEM: 19.0%
The probability that Republicans will take control of the Senate:
Intrade: 6.0%
IEM: 1.5%
For the efficient markets hypothesis to hold, someone should either be going massively long on the GOP or massively short on the Democrats in at least one of these markets as there is "free" money available on a series of heads I win, tails I'm rich bets.
Just keep that in mind when the betting markets are used as evidence of any particular point until the last couple of weeks before an election. At that point, they are nice collectors of conventional wisdom at a single glance.
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