Information markets are gaining a good name as fairly accurate predictors of events in the future. more pertinently, they are used now to test the probability of electoral outcomes for specific candidates in addition to sporting or other events. Accepting that I have simplified the logic behind it, it is claimed that information markets are approximations of futures markets to the extent that they allow informed players to wager bets and stake money in the results. They have been accurate predictors of the outcomes political contests and in cases even been more accurate than pre-election opinion polls. So far so good.
General excitement in the discovery of a new tool brings to mind the fact that novelty leads to the possibility that its real limitations are not taken into account. David Leonhardt, writing in the NYT here, identifies some of the existing weaknesses of Intrade and how those are being exploited.
As if the lesson deserves to be stated again, the exuberance was obviously unwarranted because the equity markets in which information markets are modeled are not perfect predictors either. Therefore, Intrade may have a thin market with a small number of really savvy traders on some of the calls. This sounds to me as the same problems that afflict a number of futures markets too. The article nails it with the statement that these markets are not as advanced as their most vocal supporters may claim.
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