The Problem With Prediction Markets

My knowing little about the ins and outs of online "predictive markets" hasn't kept me from wondering over the years why U.S. politicians don‘t attack this kind of Internet gambling with the same vigor they apply to online poker.

The question rose anew recently with a revelation by Intrade -- an online predictive market based in Ireland -- that someone had poured hundreds of thousands of dollars into an ill-fated and from all accounts ill-advised attempt to boost the value of "shares" backing the proposition that John McCain will be elected president. Was this fellow simply a wealthy and wild-eyed McCain supporter, or as one expert speculated "... one of the most foolish investors in the world?"

There was at least one other possible motivation that had eyebrows raised and tongues wagging: politics. This theory holds that McCain being seen as doing better among online "investors" might somehow translate to his doing better among real voters, given the conventional wisdom that persuadable individuals tend to gravitate toward candidates who look to be winning. (Hence the hullabaloo about TV networks calling races before polls close on the West Coast.)

"I've always wondered if someone might try this," wrote Josh Marshall on the political site Talking Points Memo. ... Me, too.

Intrade issued a statement saying that its internal investigation confirmed that a single "institutional investor" had been responsible for the "unusual price movements and discrepancies," but that none of Intrade's own rules had been broken. That's comforting.

Which brings me full circle to my initial point: One of the cudgels used by opponents of online gambling is that government prohibition is needed because you never know what's going on behind the scenes with unregulated wagering sites.

Maybe the poker sites should just call themselves predictive markets.

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Source: Paul MacNamara, New York Times