Yeah, this is another one of those posts that have little to do with real estate but it’s about a favorite topic of mine that is really cool.
One of the best ways to put a value on something is to put it on the market. You’ll find out soon enough what it’s worth. Similarly, you can get a very quick and pretty decent estimate of the likelihood of something happening by putting the outcome of that event on the market. You essentially let market participants trade shares in the outcome. The higher the market thinks the probability of a particular outcome is the higher that particular share will trade. If a particular outcome was absolutely certain then it would trade at a value of 1 and if it was certain that it would not happen it would trade at 0. The final value of the share is determined by whether or not the outcome is actually realized and all shareholders are cashed out at that time.
The market where the trading of these outcome shares occurs is called a prediction market and they’ve actually been around for a while, often in an academic setting. I was a participant in a great one called Intrade until they got dismantled in the wake of some kind of accounting malfeasance. They also ran afoul of some US government regulations about gambling or futures trading…I don’t recall the exact issue but they had to liquidate all US accounts before they went under, which was actually fortunate for me.
The concept is actually similar to parimutuel betting where the aggregate bets determine the payout and also reflect the aggregate estimate of the likelihood of a particular event occurring. The main difference is that in parimutuel betting the bets are aggregated, betting is stopped before events start to unfold, and everyone gets the same payout. In contrast a prediction market utilizes trading, trades up until the last minute and everyone gets a different payout that is determined by what they originally paid for the shares and what those shares are ultimately cashed out for – 0 or 1.
In addition to using these markets to assess the probability of an event occurring you could also use markets like these to buy insurance. For instance, if you really, really didn’t want a particular outcome to occur you could buy that contract so that you get a payout if it actually comes to pass.
When Intrade was in operation I was in awe of it’s predictive power and would regularly visit the site to get insights into the odds of various events occuring. I remember that the Sarah Palin running mate contract took off a few hours before it was actually announced that she would be the VP candidate in the 2008 election. No, I don’t recall what happened to John McCain’s odds of winning the election after that happened but I wish I did.
Ever since Intrade went down I’ve been holding out hope that another prediction market would step up to the plate to take it’s place and now I’ve finally found one. I just opened an account with Predictit, which is in beta and has actually received a no-action letter from the Commodity Futures Trading Commission, which I think means they are OK for now.
If you check out their markets right now you will see that the market is giving Hillary only a 76% chance of getting the Democratic nomination and a 54% chance of winning the White House. If you don’t agree with those odds you are free to open an account and take a position. Just make sure you read all the rules about the fees charged first. They take 10% of your profits and they charge you 5% to take money out of your account but it’s worth it just for the entertainment value.
#PredictionMarket #2016Election
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