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Source link: http://archive.mises.org/3492/futures-market-right-on-new-pope/

Futures Market Right on New Pope

April 19, 2005 by

“Lots of ordinary people putting their heads together do better than small groups of experts,” writes the BBC’s Stephen Evans:

If you had wanted to know who was the most likely Cardinal to be promoted to Pope you shouldn’t have relied on the pundits.

Nor should you have taken any notice of the Vatican watchers who studied the arcane politics of the Catholic Church.

Your best bet would have been, well, a bet – or, rather, an investment in an online futures market.

They got it spot on.


The Intrade futures market had Cardinal Ratzinger as well ahead of the field.

On top of that, it – or rather the tens of thousands of traders collectively – reckoned there was a 60% chance of there being a European Pope.

The way it worked on the Irish-based website was that a contract for Cardinal Ratzinger to be chosen would pay out $10 once he was elected.

Such a contract could be bought or sold and so the price would rise or fall between zero and ten dollars according to how the market viewed the likelihood. And it viewed him as more likely than any other Cardinal.

Hat tip to Mark Brady at Liberty and Power.

{ 11 comments }

Pete Canning April 19, 2005 at 3:44 pm

I guess it depends on the exchange, but the tradesports.com “market” was quite wrong about the latest presidential election.

tz April 19, 2005 at 4:20 pm

But didn’t the various markets also consider Enron, Worldcom, Global Crossing, Fannie, etc. good bets?

People can also be very stupid in groups.

“Democracy” produces collective folly more often than wisdom.

Mike Linksvayer April 19, 2005 at 7:18 pm

Pete: Tradesports consistently favored Bush to win throughout 2004. See http://www.chrisfmasse.com/2/2004/20041231.html.

aaron April 19, 2005 at 8:30 pm

the markets sold enron etc. months before any news item, just compare a chart to the dates that the real news came out.

Pete Canning April 20, 2005 at 12:19 am

Bush contracts were at 30 at 9 eastern time on election night. That is hardly a prediction.

Half Sigma April 20, 2005 at 10:08 am

But the papal market was not all that efficient (probably because it was too small), as I pointed out two days ago in my blog post on papal arbitrage.

F Meyer April 22, 2005 at 10:28 am

A concerted effort was made to drive the price of Bush contracts down on election night by placing massive sell orders at very low prices. Whoever was behind it lost a bunch of money, as other participants in the market bought Bush contracts with both hands, and the price bounced up to where it had been in the days leading up to election night.

Since the market was fairly small, a SOROS type could do this with what would be, to him, pocket change. If these event contract markets grow to the point where it would too expensive even for SOROS to perturb them, then such interventions will be unlikely.

Pete Canning April 22, 2005 at 10:38 am

I would not be surprised if Soros was trying to work a bit of reflexivity magic. Setting that aside, there remains no reason to put much stock in “prediction markets.”

Illuminatus April 22, 2005 at 12:33 pm

Perhaps someone can set up a prediction market to determine the question whether prediction markets are worthwhile.

PF April 22, 2005 at 2:03 pm

The Bush tradesport contract was accurate in tracking the election results and had Bush with a 3-5 percentage point lead during the week leading up to the eve of the election. Bush won the election 51% to 48% by 3%. On election day around 11am news was circulating among knowledgeable people at high levels within both parties that the early exit polls in Ohio and Florida had predicted an unexpected Kerry blow out in those key States. That information was then acted upon by market participants who started selling Bush contracts and buying Kerry contracts. Then news of the exit polls spread to the media and a Bush contract crash occured as all information was pointing to a suprise Kerry win. Only after 9pm when the network exit polls suggested the earlier polls about Florida and Ohio were not accurate did a Bush contract rally insue. (Although it started to come off its low of 18% at 3pm when news of the inacuracy in the earlier exit polls were circulating among political insiders. The mood behind the scene at the Kerry campaign headquarters was reported as worried by the latest polls at 5pm. The Bush contract was slowly bid up from 20% to 30% then to 39% then it rallied around 9pm.)

This demonstrated that the market was able to predict the eventual results very accurately. The market efficiently deceminated the information up to the “Anomaly” of the inaccurate exit poll which caused a classic market panic and crash in an illiquid market. It is important to note that there was a great amount of interest and participation in the 2004 US Presidential election contracts creating a large enough market to accurately prediction future events based upon the decemination of current information of market participants.

Pete Canning April 22, 2005 at 2:09 pm

PF, do you believe in Efficient Market Hypothesis?

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