Arbitrage

You can buy contracts for a Democrat to win the Presidential election for 54 cents on the dollar on InTrade, and sell them for 63 cents on the Iowa Market.

You can now sell contracts for the Democrats to win the Presidential popular vote at 63 cents on the dollar on the Iowa Electronic Markets, and buy contracts on InTrade for the Democrat to win the election (which I assume means electoral votes or election by the House in the case of an electoral-vote tie) for 54 cents. Of the two, it’s the Iowa market that has the narrower spreads: the bid-asked is only a tenth of a cent, while on InTrade it’s a cent and a half. (The sum of the bids for “Dem” and Rep” on Iowa is .999l; the sum of the bids for “Dem” “Rep” and “Field” on InTrade is also .999.)

Now this might in theory represent a big chance for John McCain to win the Electoral College while losing the popular vote, but fivethirtyeight.com rates that probability at under half a percent, while rating Obama’s chances of pulling off the same feat at more than 8 percent, with an additional 3% chance of a tie, which would also send Obama to the White House (current count of delegations is 26-21-3).

Iowa has a vote-share market as well as winner-take-all, and that market shows an expected popular-vote margin for Obama of 5 percent, though the bid-asked spreads are wider.

The more actively traded InTrade contracts are on individuals rather than parties, but those numbers show a “Dutch book,” with the sum of the bid prices coming to 1.014.

So I conclude that our overseas readers, and our American readers not concerned about violating the laws about internet gambling, should start doing some arbitrage. Sell Democrats in Ames, buy them in Dublin, and sit back.

Still, the arbitrage is puzzling. Any theories?

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com