Comments on: Nerdy Sunday – Sim Certainty Edition

By: caf

caf — Mon, 29 Sep 2008 23:11:00 +0000

My contention is that the market has both an idea of where the parties currently stand, and the chance of that standing changing between now and election day. To simplify, if you pick a state where the Democrats are well in front, the market will have some estimation of the probability of the Democrats winning, were the current situation to prevail (say 90%: P_now = 0.9). The market also might estimate that there is some small but not insignificant chance of a “game-changing event” occuring between now and election day that throws the switch to Republican (say 20%: P_tampa = 0.2). Then the overall current estimate of the Democrats winning on election day is P_now * (1 – P_tampa) = 0.72, or 72%. As election day approaches though, P_tampa approaches zero, which means the current estimate (ie, the market price) approaches P_now.

In a nutshell, that’s why I think the market prices should naturally polarise as we get closer to election day – so I don’t think we need to apply any additional tricks to effectively make them polarise more. You can also imagine what would happen at the extreme – if there was a market for say, Democrat versus Republican as the 2108 election winner – ignoring the “any other” possibility, it would be pretty much 50/50, neatly illustrating how the market price accounts for time out from election.

Note that this isn’t disagreeing with the idea of longshot bias in general. Just the idea of altering the longshot bias adjustment based on time out from election.

Oh, and yes, it’s from Bubble Bobble

By: Possum

Possum — Mon, 29 Sep 2008 00:49:29 +0000

Caf – is your avatar from Bubble Bobble!?

By: Possum

Possum — Mon, 29 Sep 2008 00:48:53 +0000

Caf – you have reservations? I find that hard to believe!

I think you meant “…10/90 only months out from the election should, all else being equal, drift towards 30/70 as the election approaches”?

We’re really looking for the wisdom of the crowds (or more to the point, the wisdom of the self interested crowd), rather than the unanimity of them.

Looking back at the historical Intrade numbers – they do, on the whole, tend to polarise for the majority of contests as the election draws closer (and we are starting to see that now with the States) – but there are always a handful of States that have uncertainty, where there isn’t 60/40 or 70/30 agreement in the market over which party will win. For a prediction market sim, it’s really those markets where uncertainty exists which are the key to the simulations as we approach election day itself.

Yet even for those States that polarise to probabilities approaching 80% (for example) – in the sims, they have an enormous pollution effect if there’s even a handful of them that carry large amounts of ECV’s. Since 30/70 seems pretty close to the effective cut off threshold for Intrade probabilities just before the election, if nothing else, having a 30/70 draw removes that pollution from States with greater than 70% probabilities since they’re never really in the contest by that stage anyway.

By: caf

caf — Sun, 28 Sep 2008 08:19:58 +0000

I still have reservations about this In theory, as the election becomes closer the markets should tighten up themselves, because the “time available for a game-changing event” and similar should be factored into the price by the traders. That is, a market that is 30/70 only months out from the election should, all else being equal, drift towards 10/90 as the election approaches. If it doesn’t, either the traders aren’t behaving rationally (which calls the whole analysis into question), or something else has changed the market’s opinion.