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Using betting games to predict outcomes has introduced a number of political contracts for the 2008 U.S. election already (!). Below is the current information for a bet that Barack Obama will win the 2008 U.S. Presidential election.

Part A: How do these prediction markets rely on the three general purpose technologies that underlie the growth of the Internet?

Part B: The currently observed prices for Presidential candidates, as of December 12 and based on the last trade made, are
Senator Hillary Clinton (D) $0.29
Senator John McCain (R) $0.28
Senator Barack Obama (D) $0.15
Former Mayor Rudy Guiliani (R) $0.11
Former Gov. Mitt Romney (R) $0.10
Former VP Al Gore (D) $0.05
Former Senator John Edwards (D) $0.04

Each of these contracts represents a bet that pays $1 if the named individual wins the Presidency in 2008, $0 otherwise. According to these predication market prices, how likely is it that someone NOT on this list will be the next President of the United States?

Part C: The League of Women Voters sponsors debates in both the Democratic and Republican early primaries. They want to only invite "serious" candidates, but they often don't really know how to define that. They propose limiting the field to candidates receiving at least a minimum price on Tradesports. Why might a proposal such as this make the Presidential candidate prediction market less accurate? Are there scenarios where this proposal might increase the accuracy of the prediction market?

See attached file for full problem description.


Solution Preview

Betting games have been established as very effective way to forecast the future. By aggregating many opinions, they essentially pool all known information. Their accuracy is often thought to be because traders must literally 'put their money where their mouth is' (Hanson 1999).

Part A. The three GPTs that underlie the growth of the internet are individualization, digitalization, and networking. Digital GPTs allow for consumer-to-consumer transactions. This enables the parties to wager each other for real money. Individualization permits to recognize each player separately. Each person can participate in this gaming web site as an individual, ...

Solution Summary

Using betting games to predict outcomes.