The Market’s Response to Rick Perry’s Poor Debate Performance
During the Republican presidential debate last week, Governor Rick Perry of Texas could not remember the third national government agency he wanted to eliminate.
“The third one, I can’t,” he finally said, a sad look on his face, after 53 seconds had gone by. “Sorry. Oops.” [3]
During the few seconds of this verbal gaffe, Perry’s chance of winning the Republican nomination, as represented by the prediction market on Intrade, plummeted from 9% to a low of 3% before leveling out to 4% by the end of the debate [2]. Presented with information universally available from a nationally broadcast debate, the market responded emphatically that Perry’s chances of winning the nomination were dwindling.
Professor Easley showed in lecture a prediction market for Obama’s chance of winning the 2012 presidency. On a site called Intrade, anyone can create an account and start selling or buying shares in any market in which people want to make predictions on the future. Because of the way the site is set up, in most popular markets, there are no obvious monopolies, cartels, or an unfair advantage. Most people have the same amount of information, and no single investor can significantly shift the market. This competitive market is a reflection of the wisdom of crowds where every buyer and seller is treated equally [1]. One could argue that this market is an accurate representation of people’s beliefs at the time. It is certainly not a perfect predictor, but it has a decent track record. And perhaps more importantly, the predictions tend to get more accurate when people attempt to manipulate the market because profit opportunities arise for others [4].
When Perry forgot the third federal agency he wanted to eliminate, most in the audience were probably just laughing or cringing. But on prediction markets, traders were in a frenzy to try and sell as quickly as possible, cutting the price in half within seconds. Prediction markets showcase a strong feature of a competitive market – that individuals’ desire to maximize profits can lead to an accurate prediction of people’s beliefs at the time and perhaps even predict the outcome of a complex event.
http://www.citizeneconomists.com/blogs/2011/11/14/the-wisdom-of-crowds/ [1]
http://economix.blogs.nytimes.com/2011/11/10/rick-perrys-intrade-flash-crash/ [2]
http://hanson.gmu.edu/biastest.pdf [4]