The Enlightened Despot

Back in the early days of the Despot, I argued that Intrade was the place to go for election predictions:

President McCain futures are trading at 43.7 over at Intrade at the moment. It would be a stretch to call guessing about politics an efficient market at this point, but as a rule it’s always better to listen to people who are paid to be right than to people who are paid to say clever and interesting things. As far as I know, Intrade is the best game in town for the former.

I still believe that the principle here is correct. Certainly Las Vegas is far more reliable than ESPN when it comes to predicting the outcomes of sporting events, and anyone foolish enough to take stock tips from magazines should think again. The inefficiency of this particular market, however, is pretty staggering. This shouldn’t be all that surprising, as a market in which Americans cannot legally invest has a serious handicap when it comes to predicting U.S. elections. As it turns out, it’s fairly easy to see the nature of that inefficiency by looking at the presidential election markets over the past few weeks.

The basic problem is that Intrade’s Obama/McCain futures are far too closely tied to polling trends. Here is a graph of the Obama market over the past month:

(more…)