Herman Cain and Obama in Prediction Markets
The top article discusses how Herman Cain’s price in the prediction market for the Republican nomination has fallen from 6.8 to 3.8. This drop is due to the fourth woman who came on television to say that Cain sexually harassed her during his time in the restaurant business. It discusses how there is an ever decreasing chance that Herman Cain will win the nomination as evident in the current prediction market.
The second article also discusses the 2012 election but instead discusses how Obama has a 50.9 chance of winning based on the prediction market. It goes on to discuss how prediction markets work in that the numbers represent the price one could buy a contract that would pay out, in this case, if Obama won. The 50.9 therefore means that $100 costs $50.90 (or $1 costs 50.9 cents) but you only get the $100 (or the $1) if Obama wins.
In class we discussed prediction markets and how the prices are taken as probabilities of the event actually happening. That is to say that Herman Cain now has a 3.8% chance of winning the Republican nomination and Obama has a 50.9% chance of being re-elected. Prediction markets are a much better way of figuring out the probabilities of events happening than other ways such as polls. They predicted Howard Dean’s 2004 nomination disintegration and in 2006 predicted every Senate race (http://online.wsj.com/article/SB119902559340658043.html). Prediction markets work by integrating separate pieces of information, all of which are based on separate people’s observations about, in this case, the 2012 race. The market, in effect, creates a summary that reliably points to what is most likely going to happen.