Prediction markets failed to accurately predict the unexpected effect a few tears had on the New Hampshire primaries; and some analysts rushed to blame the tool and undermine its reliability and applicability. Let me restate some fundamentals and my view, in a snapshot:

  • Markets are not prophets, prophets do not exist.
  • A mechanism’s forecastability should not be judged against a virtual fool-proof prophet; we’d better compare it with other existing or widely-used mechanisms and -to my partial and context-bound knowledge- markets outperform all those.
  • Markets are the only tool that intrinsically suggests their probability of failure. If Obama’s stock is traded at 70 cents, this suggests that there is a 30% probability of Obama losing; I’d say markets are by character modest and no fanfare has any place in describing their suggestions.
  • Markets are primarily an aggregation/meta mechanism; as such, garbage-in-garbage-out effects are expected to happen, so we’d need to keep focus on minimizing garbage rather than blaming the market/compiler.
  • Maturity of the mechanism and its use, as long as trading volume (in real-money intrade for example), have not yet reached a fully efficient level (more on this to come soon), but these result in significant profit opportunities, so I expect things to just keep getting better.

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