InTrade and the Affordable Care Act Decision

Dave Weigel tweeted:

Fun fact: InTrade put “mandate will be overturned” at 73% yesterday. Another fun fact: InTrade is useless.

Disagree! InTradeis, the online trading exchange website in which members speculate on the outcomes of various future events, isn’t useless; it’s just that you have to use it for what it’s good for, which is putting a number on conventional and insider thinking. That’s quite useful, indeed; it just isn’t the same thing as saying that InTrade will always be good at predicting the future. For that, you need to know whether conventional wisdom and insider thinking is likely to be correct or not.

So, for example: during the GOP nomination battle, there was a ton of hype at one point about Herman Cain, and you could find plenty of examples of people saying that Cain really had a significant chance of winning. But if you look at InTrade, you find that at least according to those in that market, it was all phony hype. As opposed to the Newt Gingrich bubble, which really did involve (foolish, but still) people thinking he really might win.

Now, how accurate is InTrade at judging conventional and insider wisdom? Obviously, that’s impossible to know, but I think it holds up pretty well. In the Supreme Court example, I think in fact that the bulk of opinion from oral arguments on was that the mandate was toast. So InTrade did what it does; it’s just that even the wise guys were wrong on this one (collectively, that is).

So how do you use it? Exactly as you would use any non-numeric indication of what insiders are thinking. If there’s good reason to think that insiders know a lot, then what they predict is apt to be a good prediction. If not, not.

It’s a tool. As with all tools, be careful to use it only for what it’s design allows it to do.

[Cross-posted at A plain blog about politics]

Jonathan Bernstein

Jonathan Bernstein is a political scientist who writes about American politics, especially the presidency, Congress, parties, and elections.