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Tradesports has started a new series of contracts on how many seats the Democrats will pick up in the House this election. I’m not sure why they started these contracts just a few weeks before the election, but here are the prices as of this morning:

Democrats pick up at least:

Contract...................Price
0.5 seats...................95
4.5 seats...................88
9.5 seats...................68
14.5 seats.................60
19.5 seats.................41
24.5 seats.................20
29.5 seats.................13

We can bust out a little math and find some interesting numbers.

**Inserting Pocket Protector**

If there’s a 60% chance of the Democrats getting at least 14 seats (they need 15 to get control), and a 41% chance of getting at least 19 seats, we can find the implied standard deviation.

A 60% probability works out to +0.2533 standard deviations (=normsinv(.6) in Excel), 41% comes to -0.2275 standard deviations. So those five seats are worth the difference, or 0.4809 standard deviations, and 5/0.4809 equals 10.3973 seats.

So Tradesports currently thinks the Democrats will pick up about 17.1 seats with a standard deviation of 10.4 seats.

This is pretty similar to how the VIX is calculated.

Posted by edelfenbein at October 12, 2006 10:25 AM