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James Ledbetter at Slate brings up one of my pet peeves today. He's about the 600th writer to ask why are predictions markets so often wrong.

The answer is simple: They're not predictions markets, they're really odds-setting markets. Just because the event with the highest odds didn't come to pass, doesn't mean that the market is somehow wrong.

The Giants beat the point spread in the Super Bowl. Did Vegas fail? No, it's called an upset.

Nearly four years ago, Google went public at $85. Did the stock market get it wrong? Of course not, Google proved its worth to shareholders over time. Over the last six months, the reverse is happening. The markets adjust.

As I've said many times, I don't take these markets too seriously. They're for fun and most of the standard complaints are accurate (too small, too partisan).

Another aspect that people must understand about these markets is that they're futures markets. This means there's a very large dispersion of returns. In other words, you get all or nothing. That's a little different from your standard stock market. As a result, these markets can be far more volatile than what you may normally be used to.

By the way, John McCain's contract to win the GOP nomination is going for 94.1/94.3. Hmmm. That could be a good money market substitute until the convention this summer.

Posted by edelfenbein at April 16, 2008 9:46 AM