I thought I would share briefly an experience I had at APSA.

At the time, the prediction market Intrade (http://www.intrade.com)  
showed a $1 contract on John McCain was priced at $0.40 -- suggesting  
the market believed McCain had a 40% chance of winning the election.   
At Sunshine Hillygus, Maggie Penn, and John Patty's "Kickin' APSA"  
party, Patty seemed pretty confident that the market was wrong -- he  
was willing to bet me $100 at even odds that McCain would win.

Today McCain actually briefly climbed over $0.50 -- so maybe Patty was  
right.

But it doesn't matter -- immediately after APSA I bought 200 shares of  
McCain at Intrade for $80.

If McCain wins, Intrade will give me $200 and I'll give $100 to  
Patty.  Net profit: $20

If McCain loses, Intrade will give me nothing, but Patty will give me  
$100.  Net profit: $20

I love risk-free investments (though I guess I should have checked  
Moody's credit rating for Patty....).

And, in a way, I am also partially responsible for the McCain market  
moving up.  My arbitrage moved the market exactly the way it is  
supposed to, integrating Patty's expert intuition into the price.

That's why I use prediction market prices instead of poll aggregates  
in my own research to measure electoral probabilities (http://jhfowler.ucsd.edu/elections_and_markets.pdf 
).  Investors might have partisan biases, but there are always people  
like me willing to arbitrage them away....

:)

james

James H. Fowler
UC San Diego
http://jhfowler.ucsd.edu




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