Intrade Says: Obama Wins

Jun 11th, 2008 | By | Category: 2008

(From via slashdot)

Intrade, an online futures trading website, allows you to make investments based on whether or not you believe a given event is likely to happen. Will the average price of gasoline be over $4.00 on June 30th? Will Israel and/or the US bomb Iran by the 30th of September? Will McCain or Obama win any given state in the 2008 election?

If you choose properly, the investment pays $100. Choose wrong, and you get nothing. You can buy a contract (or sell an existing contract) at some price between $0 and $100. The more people certain that a given even will occur, the closer this price will be to $100. The less certain, the closer to $0. So, you can think of the price of the contract as the rough likelihood of an event occurring in all the investors minds–a sort of opinion poll.

Because, presumably, each investor is integrating a lot of information when deciding to buy a contract or not, we can think of this price as a sort of average of independent averages. If we convince ourselves of this, we can apply the central limit theorem and assume all sorts of nice things about the error of this contract price. Even if the individual investors are each biased, the overall error price should be normally distributed, if the central limit theorem holds. In English? There are reasons to believe that the contract price is a pretty decent reflection of (future) reality.

What is doing is looking at the contract prices for each State’s race between Obama and McCain in November, calling the states based on the current contract prices and adding up the electoral votes. If you do it right now, Obama wins.