No information arbitrage?

First, read this article, fascinating article about how seeing where people put their money where their mouth is is a more accurate forecaster than opinion polling.


I was looking at US political futures today on 2 sites, 1 being based in the UK, betfair.com (and thus theoretically open to UK residents), and another based in the US, intrade.com. Barack Obama is roughly a 60-40 favourite to be the president. I was struck by how close the percentages quoted were on both sites. I had made a few assumptions:

That many people would go onto these sites just for a rough punt. So there should be no logical reason why the prices should equalize over the 2 markets.

Second, the markets are artificially segmented by residence, so even if they do accurately reflect expectations one should expect that british expectations should differ from american ones (due to different media coverage, biases, etc). So it was quite eye-opening to read this article.

So it occurs that some form of no-arbitrage does hold in predictions markets. ok, next step, figure out how the markets aggregate information. Is the market driven by insiders who make big bets when price diverge from what seems obvious to them (e.g, insiders working on the campaign who have a very good sense of how it's going through evaluating poll data and on-the ground knowledge). Then the small stakers are simply price takers, or look at already existing prices as markers. So in a sense, the stronger the knowledge is, the more it contributes to the price. This seems to fit with the liquidity patterns of the markets. The alternative explanation would be that people who place a parlay actively search for information by aggregating all the polls into a "super-average" poll. This is how theoretically stock markets work but I suspect that even the former hypothesis holds for stock markets.

anyway, it's amazing that these things exist nowadays. there's no reason they should. ever need to hedge against a democrat winning? buy democrat futures. perhaps you're dependent on republican trade policy. so yes, the world which kenneth arrow dreamed off is becoming a little more perfect everyday. one arrow security for every state of the world. vulnerable to instability in the middle east? Got to get one of those futures against the US and Israel bombing Iran (15% chance of that happening)

my favourite quote of the day, on probability, on the european poker tour.

table was showing quad 4's to Player A, and 3 pair to another (Player B) with the river card to come, Player B was thus drawing dead (nothing the last card could do to make her win). So the probabilities were quoted at (100%-0%). the commentator replied : "i don't understand how they can be so sure. there's always a risk the chandelier will fall through the table and nobody can remember what the cards were."

well of course, they're quoted to the nearest whole number, so i'm sure infinitesimal chance of that happening isn't quoted. in the words of what i unfortunately, have to go back to studying now, the limit of the probability that player A will win is 1.

ok, i need to concentrate on analysis now.

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