No, the Political Futures Markets Didn’t Fail

Just after the healthcare bill passed, Daniel Gross shows up to deliver his annual misunderstanding of the political futures markets:

Is there a larger lesson here? (Aside from the obvious one, which is political futures markets usually aren’t very good at predicting what actually will happen in the future?) I think so. And it’s this: Don’t short Obama. In fact, that’s been the lesson of Obama’s entire career so far.
Think of Obama as a stock. When he came onto the national scene, he was small and undercapitalized. Some investors (i.e., donors and organizers) went long, but plenty of the heaviest hitters bet against him. During the campaign, the prospects of his success were continually downplayed by the Clintons, the national media, and the Republicans.

Leaving aside his schoolgirl crush on the president, we have to once again say that political futures markets are not “predictions markets,” they merely odds setting markets. They attempt to place the odds that some event will happen in the future. And guess what, those odds can change!
Just because the odds for healthcare’s passing went from low to high doesn’t mean the markets got it wrong. Perhaps it was an accurate reflection of reality. As far as I follow these things, that seems to be pretty much what happened. After Scott Brown won in Massachusetts, lots of people thought healthcare was dead. The outlook changed and the futures market followed.
Also, the futures markets were correct in the end. The contract to pass healthcare cross 50 three weeks ago, and was running around 97 moments before the roll call, which had a margin of just four votes. Doesn’t sound like failing to me. Also, just because something happen doesn’t mean it wasn’t a long shot. That’s what odds are about. Shares of DuPont (DD) are at a new high today. Does that mean that the stock market has failed?
There are problems with the political futures markets. These markets tend to be very small and illiquid. I also think Intrade does a very poor job of selecting what real world events to follow. They should steer clear of things like who will be the Vice-Presidential or Supreme Court pick. That outcome is solely determined by one person’s judgment. The markets work better when they’re trying to determine the outcome of something with many more variables. Even the outcome of the healthcare bill was largely determined by Nancy Pelosi’s determinations (or intransigence, depending on your point of view).
The markets didn’t fail. They adjusted. That’s what markets do.

Posted by on March 23rd, 2010 at 9:17 am


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