Prediction Markets and Manipulation

As many people suspected someone was manipulating Intrade to boost John McCain’s stock price
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This is big news but not for the reasons that most people think. Although some manipulation is clearly possible in the short run, the manipulation was already suspected due to differences between Intrade and other prediction markets. As a result,

According to Intrade bulletin boards and market histories, smaller investors swept in to take advantage of what they saw as price discrepancies caused by the market shifts — quickly returning the Obama and McCain futures prices to their previous value.

This resulted in losses for the investor and profits for the small investors who followed the patterns to take maximum advantage.

This supports Robin Hanson’s and Ryan Oprea’s finding that manipulation can improve (!) prediction markets – the reason is that manipulation offers informed investors a free lunch.

Manipulation of Prediction Markets,” by Alex Tabarrok, Marginal Revolution, October 18, 2008
After the election, for analysis of what the election means in Congress, see our Capitol Hill Workshop: 2008 Election.


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