Tuesday, October 19, 2004

Spoilers make things better

There are a bunch of prediction markets where you can put some money where your mouth is and make your call on (among other things) who will win the election. If you guess right, you make money. If you guess wrong, you lose money.

More importantly, it makes you think in terms of probabilities, not certainties. For example, a contract on Kerry winning may be worth buying at 55%, but be worth selling at 95%. It's likely he will win, but not certain. This sort of enforced, detached rationality is far removed from our natural instincts and so best treated as the type of abstract game that makes markets so hated and so effective.

Some people think the markets are being manipulated by folks coming in and placing big bets in the direction (I guess) that they are rooting for. In most other systems, such gaming would ruin the way it was meant to work and cause the system to break down. In markets, however, such manipulation actually *improves* the environment for serious traders because manipulations means profit opportunity and the more profit opportunity there is, the more desireable serious trading begins. Marginal Revolution has the scoop.

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