But prediction markets also encounter the occasional
snafu. The contracts are designed to be "yes/no" propositions: like, will Trump
win in 2012? Election results are easy to verify. But in 2006, one contract
asked whether North Korea would launch a missile outside of its airspace. In
July 2006, Pyongyang launched just such a missile. But the contract didn't pay
out because the small print required confirmation by the U.S. Department of
Defense. The White House press secretary said a launch had happened, but
Defense never confirmed because it was considered an issue of national
security. Cue many irate traders.
Some markets can prove politically explosive. In 2003,
the Department of Defense developed a $3 million futures market to predict
assassinations, coups, and terrorist attacks in the Middle East. After a
congressional backlash, the plan was shelved. Deputy Defense Secretary Paul D.
Wolfowitz said, "I share your shock at this kind of program ... it is being
Still, for those upset about missing an opportunity to
profit from catastrophe--don't fear. Intrade allows a bet on whether "a successful WMD
terrorist attack [will] occur anywhere in the world before midnight ET 31 Dec
2013." The current probability is 28 percent.
Perhaps political correctness--or simple human
decency--prevents people from wagering on Obama resigning from the presidency,
or dying in office. But there is a workaround, by betting that Joe Biden will
be elected president in 2012 (0.6 percent).
Another issue is that in prediction markets, there is an
opportunity to manipulate the contract prices, and therefore the apparent
probability of an event. If Trump's supporters purchased Trump 2012 contracts
en masse, it would boost his seeming chances of winning. In a world in which
being seen as the winner can be self-fulfilling, the idea is not as crazy as it
And are prediction markets even legal? Good question. Intrade is based in
the Republic of Ireland, and the legal status of prediction markets in the
United States remains murky. Is it gambling or is it more akin to investing in
the stock market? The jury is out.
So what do the Intrade tea leaves have in store for us?
Well, many of the current odds seem plausible enough,
like the 70-percent chance that Muammar Qaddafi will be out of office by the
end of the year.
Other probabilities appear a little skewed. Obama is only
given a 59 percent chance of winning reelection in 2012. This strikes me as a
little low, given that Obama has the advantage of incumbency, he likely won't
face a serious primary challenger, the economy is improving (albeit slowly),
the killing of Bin Laden may provide a small but permanent lift in the polls,
and the Republican bench is lacking in star appeal.
Meanwhile, Trump's 5.2-percent chance of becoming
president is surely generous and puts him roughly on a par with Tim Pawlenty.