Entries in Intrade (6)


Intrade was right -- "worst case" unemployment projections too rosy

The latest unemployment figures put the U.S. rate at 9.4%. That puts already above the peak of the government's "baseline scenario" used to "stress test" the nation's bank.

Here's a great chart from Calculated Risk comparing the government's scenarios for unemployment rate and the observed rate.

The Intrade market was more pessimistic. As we wrote back in early May, participants gave a 60% chance than unemployment would pass the 10% mark by December 2009. The prediction market saw through the softball predictions of the government.


Intrade unemployment forecasts question the "adversity" of the bank stress tests

Following the results of the government's bank stress tests announcement yesterday, many analysts today complained that the test was not quite stressful enough. The main gripe was the unemployment figures postulated in the methodology were too rosy a forecast.

The US is currently experiencing 8.5% unemployment. In the ADVERSE Scenario, which 'was designed to characterize a recession that is longer and more severe than the consensus expectation', unemployement would peak at 10.3% or so by 4th quarter of 2010. The BASELINE scenario, which 'reflected the consensus expectation in February 2009 among professional forecasters on the depth and duration of the recession', had unemployment peaking at 8.8% for this cycle.

I thought that it might be interesting to compare these forecasts by the government to what Intrade bettors are forecasting for the US unemployment rate by the end of the year. Today:

About 60% of the community on Intrade expects unemployment to surpass 10% in December 2009. According to this prediction market, the skeptical analysts are right: the government's forecasts are perhaps a bit too optimistic.


Will recent online gambling plea impact the prediction market industry?

The former CEO of defunct online gambling firm BetonSports this week pleaded guilty to racketeering conspiracy charges in US federal court, as reported by Reuters.

The line of most interest:

"This plea is a significant step in the government's efforts to end the proliferation of U.S.-facing offshore sportsbooks," said John Gillies, FBI special agent-in-charge in St. Louis.

How will this development impact off-shore based real-money prediction markets? Tradesports obviously has already been shut down and Betfair is illegal in the US, but I wonder if Ireland-based Intrade will be seen as more vulnerable.


The Intrade "World Crisis" Index

The following contracts were initially priced at 50.0 on January 27, 2009 at the start of the World Economic Forum in Davos. Together, they are equally weighted to form the "world crisis" index on the popular prediction market Intrade.

A higher index means that the markets predict a more disastrous 2009.

How these eight items were chosen remains mysterious. There are far greater crises than a German recession.


Perhaps Intrade isn’t doomed after all…

Barney Frank, Chairman of the House Financial Service Committee, told the Financial Times today that he will introduce a bill to establish a licensing and regulatory framework for online betting operators. Under Frank’s proposal, the Unlawful Internet Gambling Enforcement Act of 2006, the law that forced Tradesports to shut down and currently threatens all online sites where real money is exchanged, would be relaxed.

This is good news for prediction markets. Less regulation means that more prediction markets can operate with the component that market theory says is so important: financial incentive. Tradesports and IEM are so effective now in their predictive power because betters have real money at stake. SimExchange, Hollywood Stock Exchange, and others use a variety of other incentive mechanisms including public leaderboards, faux currency, and bragging rights, but none of these equal the power of cash.

This is also good news for those interested in freedom and commonsense policy. Barney rightly compares the stringent gambling penalties to those encountered during the age of prohibition. And if Maryland is going to grant waivers for slot machines, then doesn’t it make sense to allow betting that actually involves some brainpower and might influence decision making around something of consequence?


Regulation troubles mean slowdown for some markets

Alternative markets are being tra markets and the government is going to treat them as such. The prediction market Tradesports is now permanently shut down due to gambling laws, p2p lending market Prosper will be off-line for months dealing with the SEC, and the viability of craftsmen on Etsy and many other direct seller-consumer markets is threatened by legislation soon coming into effect and more legislation to come. What does this all mean?

Perhaps most importantly, the previous sky-is-the-limit land of innovation in markets is retracting. It took them some time to get started, but government lawyers are hard at work writing cease-and-desist letters and new laws that may spell doom for smaller or newer entrepreneurs in this field. Ventures that survived by operating in gray areas slightly out of reach of the regulators will find that they can hide no longer.

Government involvement in a sphere that was a demonstration of nearly pure capitalism is both regrettable and necessary.  The consensus that regulatory and policy failure contributed towards the current financial crisis and allowed the likes of Bernard Madoff to flourish required the SEC to explore hidden markets and register all sellers of securities. Recent tainted milk and leaded toy scandals in China naturally lead the government to require higher product standards for children’s products and cosmetics. 


Unfortunately for Prosper and other p2p lenders, the SEC’s actions have the most profound and immediate impact upon them, as they need to shut down (Lending Club is still open) while they spend hundreds of thousands of dollars to go through the bureaucratic process of licensing with the SEC (this is a lot of work for an organization whose average loan in 2008 was $6,047).

For small sellers of cosmetics and other homemade items, January may prove to be their last month in business as they are the forced to prove the safety of their items as dictated by the Consumer Product Safety Improvement Act (CPSIA) and the FDA Globalization Act of 2008. Due to immoral practices of Chinese manufacturers, small businesses will now need to spend thousands of dollars a year in paperwork in order to prove that their $2 homemade soaps do not contain high lead concentrations. Paradoxically, the large toy corporations who practice the outsoucing that is so feared by some American consumers will be most able to comply with the new regulations while the small crafters who make items at home using organic wool will be out of luck. The reaction by the Etsy community makes clear that many crafters will simply be forced to close down shop.

It was probably only a matter of time from the beginning for Tradesports. Their entire business model was based upon skirting gambling laws through technical operation out of Ireland, although the majority of their trades knowingly took place in the U.S. It will be interesting to see whether its non-sports affiliated site Intrade (the more innovative and interesting market I would argue) will last.

As many of the best entrepreneurial teams pushed ahead over the past several years with their alternative, and often quite persuasive, ideas, many free market enthusiasts (like myself) found it hard not to get swept up in the excitement and see these as the undenaiable future. Expectations are now revised down from their initial irrational exuberance. These upstarts have a number of hoops yet to pass through, but their promise is still bright.