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This is a favorite topic of mine. In investing, we can look at two markets and imply a third. That's basically how options work. Well...we can do the same for predictions markets.

At Tradesports, they offer futures contracts for how many seats they Democrats will pickup in the house. They offer contract for several different scenarios (i.e., greater than 14.5 seats, or greater than 19.5 seats). Assuming a logonormal distribution, we can find an implied mean and standard devation.

The chart above shows the mean number seats the Democrats looks to gain (black line) with plus and minus one standard deviation bands (red lines).

As of the last trade, the market believes the Democrats have a 60.2% chance of gaining at least 19.5 seats, and a 46.9% of gaining 24.5 seats. A 60.2% chance is +0.258 standard deviations, and a 46.9% chance is -0.078 standard deviations. So those 5 seats are worth 0.336 standard deviation. Therefore, one standard deviation is nearly 15 seats. The Democrats are now projected to gain over 23 seats, but the market still believes its wide open.

Posted by edelfenbein at November 3, 2006 3:13 PM