A Very Modest Defense of InTrade

Michael Jackson waves to his fans after being acquitted of all charges in his child molestation trial June 13, 2005 in Santa Maria, California. InTrade bettors incorrectly predicted Jackson’s verdict.

Photo by KEVIN CHANG/AFP/GettyImages

The news/prediction futures site InTrade has ceased operations, buckling under the weight of a U.S. Commodities Futures Trading Commission legal action that had already killed its business in the States. Joshua Keating, being awfully fair to the site, notes that it mostly called the last few elections, unless the result (in a swing state) was a coin-flip. Alas:

When the number of decision-makers on a given political outcome is even smaller, and information on their preferences is less available, Intrade was even less useful.  Intrade notably blew it on the Supreme Court’s decision to uphold the Affordable Care Act, giving the bill a 77 percent chance of being struck down only two days before the decision. As Barry Ritholtz has tracked, Intrade has also badly missed other decisions including the 2004 Iowa Caucus,  and the 2005 Michael Jackson trial.

Right, and the problem with InTrade as a vehicle for punditry was that pundits misunderstood the meaning of its numbers. Anyone who clicked on the site at any point in 2012 saw that the contract predicting an Obama election win was trading higher than the one predicting a win for Romney. A reasonably well-informed person could have seen that and said, “huh, based on the wisdom of crowds and their reading of publicly available polls, looks like Barack Obama will be re-elected.”

But this wasn’t how InTrade was used. The site only got covered and cited when wild swings appeared in its contracts. Pundits looked for momentum—proof that the crowds were shorting Obama stock was proof that Obama was losing. This wasn’t the market’s fault. This was the fault of pundits for being needle-in-the-arm addicted to “momentum,” right before another election that proved how flimsy the concept is in a national election. (Momentum is more real in lower-profile races, like Senate primaries.)