Presidential Decision Markets
We have had many prediction markets on who will be elected, but almost none on who should be elected. So far, the only exceptions I know are decision markets on which nominees would most help their party gain the U.S. presidency.
Today, I’m pleased to announce that Peter McCluskey has funded the creation of six now-live InTrade markets that should tell us how a Democratic versus Republican U.S. President will differently effect oil prices, long term interest rates, US government debt, and US troops in Iraq! If enough people trade these assets, then for voters who know which direction they want these parameters to move, InTrade market prices could advise them on how to vote!
Two different approaches will be tried on these four parameters. Two parameters will use a binary shock response futures approach, with one asset each paying based on whether, over the course of election day, oil prices or T-bond interest rates move in the same direction as the probability of a Democrat winner. For example, if you think (speculators think) that a Democrat is more likely to raise oil prices than a non-Democrat, you should be willing to pay more than 50 for the asset that pays 100 if these two move in the same direction. You can cash in these assets a few days after the election.
For the two other parameters, four assets will support simple conditional estimates. Each parameter will have Democrat, Non-Democrat asset pairs. The Democrat asset in the pair pays only if a Democrat is the next president, while the other asset only pays otherwise. Bundling each pair together gives assets whose prices estimate:
Dividing the price of each individual asset by market chances of a Democrat president (or not) produces estimates of these parameters conditional on a Democrat president (or not). The difference between the Democrat and the other conditional estimates say how much of a difference speculators expect a Democrat to make on that parameter. You’ll have to wait up to four years to cash in these assets.
I see four key open questions:
Can we get precise enough prices to see a Democrat versus not difference?
Can we convince voters that such prices give reliable non-partisan estimates?
Can we convince voters these prices show causal effects of the party in power?
Can enough voters tell which way they’d like these parameters to move for prices to be useful? (I’m not sure which ways I want.)
Added: Peter has been told InTrade will waive all trading fees in these markets!
Traders don't have to shift markets only through differential pricing. They can shift markets the old fashioned way, through marketing and disinformation.
How much are corporations spending to influence the election? Billions? If corporations and individuals are willing to spend millions, tens of millions and even billions on shifting public opinion, presumably they would be willing do the same thing with oil trading profits which are from pre-tax income.
What does all the saber rattling about war with Iran do to oil prices? It drives them up. Who is rattling sabers about war with Iran? Mostly the GOP. Who does the GOP blame for high oil prices? Obama.
The price of oil has two components, its actual value as a commodity used to supply energy and other things. The price also has a component of signaling. This component signals the relative risk that future prices will be higher or lower.
Oil Users make profits using oil to produce other things. Oil Speculators make profits by capturing differences between the signaling prices at different times. The signaling can be manipulated easily, just rattle the sabers with Iran. Oil Users have to take potential future disruptions seriously because they have more to lose than speculators. Oil Users have the financial risk of not recovering their investment in what ever factory it is that they use to turn oil into products that they sell.
If you look at the ratio of US oil consumption to GDP, there are large fluctuations.
http://www.epmag.com/Produc...
with GDP varying between 100x oil consumption (1999) and 15x oil consumption (2008).
Oil users with a lower GDP production to oil consumption ratio have a reduced ability to tolerate higher oil prices. Oil is not the only component of what goes into their production of GDP. Oil is the only component of an Oil Speculators production of GDP.
McCluskey's followup: http://www.bayesianinvestor...