The New York Times and Efficient Markets

Catherine Rampell has an unusually silly post at the New York Times Economix site. She looks at the giant spike in the price at Intrade’s contract to capture Osama Bin Laden and concludes that markets are inefficient.

I’m not sure how many times I’ve made this point, but that’s not what efficient markets mean. (And let me state clearly: I don’t believe markets are efficient).

Just because the price spikes doesn’t mean that a market “failed.” The market adjusts with new information. Efficient Market Hypothesis merely states that markets accurately price new information.

Sites like Intrade are mistakenly referred to as “predictions markets.” That’s not quite accurate. They’re really odds-setting markets. Those odds can change or a long-shot can pay-off. If you follow enough markets, a long-shot will pay off.

I don’t take Intrade’s markets very seriously. I think they’re fun to follow but they’re really just a sideshow. I also think Intrade does a poor job with their contracts. The real world futures contracts work best when there’s a lot of public information available on some event.

I remember when Intrade had contracts on who President Obama would appoint to the Supreme Court. That’s an awful contract because the outcome is based on one person’s decision. A better contract is who will win a party’s presidential nomination because there’s a lot of information available. Even that will mostly be a poll-watching contest.

Barry Ritholtz has more.

Posted by on May 4th, 2011 at 9:43 am

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