If you're paying attention to the veeeery early action on Intrade, one of the more popular prediction markets, Hillary Rodham Clinton has about a 50 percent chance of being the Democratic nominee and a better-than-even chance of winning the general election. John McCain is the favorite for the Republican nomination, but he's being hurt by his position on the war in Iraq. OK, so what's the deal? Well, Intrade is a Web site that allows traders to bet on politics and other current events, and it turned out to be on the money during last fall's mid-term elections. A little before 9 p.m., the collective opinion of traders gave the Republicans an 85 percent chance of holding onto the Senate. At 9, the odds were down to 65 percent. Around 9:25, they fell below 50 percent. A little before 10, the Intrade odds were just 37 percent. From Wednesday's NYT:
Over the last few years, Intrade — with headquarters in Dublin, where the gambling laws are loose — has become the biggest success story among a new crop of prediction markets. The world’s largest steel maker, Arcelor Mittal, now runs an internal market allowing its executives to predict the price of steel. Best Buy has started a market for employees to guess which DVDs and video game consoles, among other products, will be popular. Google and Eli Lilly have similar markets. The idea is to let a company’s decision-makers benefit from the collective, if often hidden, knowledge of their employees.
But there’s a broader point here, too. For a couple of centuries now, long before Intrade or even the Internet existed, financial markets have been making it easier to bet on what the future will bring. In the mid-1800s, contracts tied to the future price of wheat, pigs and other commodities began to change hands. In 1972, the Chicago Mercantile Exchange introduced futures for foreign exchange rates. Treasury bonds tied to the future rate of inflation came along in the 1990s, and last year, the Merc began selling contracts based on the direction of house prices in 10 big metropolitan areas. In every case, the market price reflects the sum of the traders’ knowledge — about the extent of the housing bubble in Los Angeles, for instance, or the likely size of next year’s wheat crop. This market price usually ends up being a more reliable forecaster than any individual, even an expert, can be.