Chart of the Day: Palin on InTrade

Here's today's intraday chart of Sarah Palin's contract at InTrade: This is meant to show the crowd's wisdom on the question of whether she will be John McCain's vice-presidential nominee. (The times are Irish, so they're 5 hours ahead of Eastern.)

Yesterday's close on the Palin contract was 4; today's open was 6. By 8:23am Eastern time she was at 90; by 9:13am, less than an hour later, she was at 12. An hour after that, at 10:14am, she was at 95.

What does this prove? That in the final hours or days before a big political result / announcement, prediction markets become less, not more, reliable. I've made this point about the Democratic New Hampshire primary, and it's worth repeating: contra Justin Wolfers, who believes that "in a moderately efficient market today's market price consolidates not only today's wisdom, but also the wisdom of those who traded in the past," prediction markets regularly fail in the feverishness of fluid and soon-to-be crystallized political speculation.

There's simply no real-world justification for the degree of volatility we saw in the Palin contract this morning; this is not a consolidation of "the wisdom of those who traded in the past" but rather a crazed market resembling nothing so much as a bunch of six-year-olds chasing a soccer ball. From here until the official announcement, ignore all noise in the vice-presidential nomination markets. It'll save you a lot of sanity.

Update: McCain's picked Palin. Congratulations to whomever it was who bought 49 contracts at 12 at 9:13am, less than two hours before the announcement. Nice trade, that person!

(HT: Cowen)

Comments

[billb:]

I don't disagree with your assessment, however, isn't the wildness of it all really just indicative of a liquidity problem? I mean, what if one big player just wanted out and it was enough to drop the price that far. I'm not sure if you can get volume figures on these trades or not.

2008 Aug 29 01:44 PM

[yogatrader:]

I think what most of us enjoy about these markets is that they are much better and less annoying than polls, or the "expert" opinion that dominate the 24-7 mainstream misinformation media. I would agree with billb, as these markets become more liquid, they improve as odds-makers. Finally, the chaotic trading of today, in many ways, does in fact represent the irrational human, real time odds, amid a black swan-like event.

2008 Aug 29 02:44 PM

[User 98201:]

you are looking at a super thinly traded and making a judgement. get real.

2008 Aug 30 08:36 AM

[lblaine:]

Unless you have inside information, the action was all just gambling.

2008 Aug 30 09:56 AM

[kkin365:]

It is interesting that this is a market where one with inside info can take a position. Surely, someone in the campaign knew the vp's identity a couple of hours before announcement. I thought an Iowa market uses play money -- maybe I am wrong.

2008 Aug 30 05:39 PM