The Clinton win in New Hampshire wasn’t only bad for Obama, its also given commentators an opportunity to knock prediction markets. New York Times has a go, as does Slate.

The problem is when the commentators read the markets and deduce that the market is predicting the favorite is the one that will win. However, the great thing about markets is they state the probability with which they make their predictions. And Obama with a 90% chance of winning means that one in ten times he won’t. Desert Vision won the 3:40 at Musselburgh this afternoon. The odds where 25/1 implying around a 4% chance. Does that mean the market was wrong? No, 25/1 shots tend to win around 1 in every 25 races (actually a bit less often due to the bookmakers margin). That just happened to be one of those races.

Basically, the ‘prediction markets where wrong’ commentators are like a bunch of punters at the race track complaining that the market wasn’t right every time the favorite doesn’t win. (In fact they should go to the race track for a probably expensive but very educational day out!)

Chris Masse is diligently following the story at Midas Oracle and the Silicon Alley Insider gives a nice analysis. Of course the only way to measure whether markets are accurate is to look at them over a number of events. Caveat Bettor is keeping the score on the primaries and it is prediction markets 3, Zogby 1 (with one 2-way tie and one 3-way tie).

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Prediction market, Intrade, topped the pollster Zogby in predicting the winners of Iowa’s caucus. The forecast taken last night at 9:30 EST shows Obama and Huckabee having clear leads on Intrade. Zogby however while forecasting a Huckabee win couldn’t separate Clinton and Obama (putting both at 28%). Interestingly, neither suggested that Clinton would end up in third place.

Onward to New Hampshire where Obama is favorite on both Intrade (67%) and Betfair (59%) to win the state. John McCain, who appears to be one of the surpising winners of Iowa, has seen his forecast probability of taking New Hampshire has shot up from around 40% to 71% over the past couple of days (Intrade).

Overall, Clinton still remains favorite to gain the Democratic nomination, but only by a sliver (52% on Intrade, 53% on Betfair). For the Republicans, John McCain has now become the front runner for the nomination (32% on Intrade, 29% on Betfair). Despite last night’s win Huckabee trails in third position on a forecast on both exchanges of 16% chance of getting the nomination.

For all you Paulites, both exchanges are forecasting around a 5% chance of Ron getting the nomination.

For me, I’ve got a tenner on Obama to get the Democrat nomination. For him to get such a resounding win in a rural 95% white state I think indicates the strength and breadth of his appeal.

Hat tip to Caveat Bettor.

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ReadWriteWeb have analysed traffic from Iowa to candidates web sites and have predicted if the caucus’s follow then Paul will take the stat for the Republicans and Obama for the Democrats.

Analysing web traffic isn’t yet a well recognised election prediction method. I guess in a few hours we will find out if it should be.

UPDATE: Bettingmarket has analysed Google trends which would predict Clinton and Paul being nominated as candidates.

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The Wall Street Journal has an excellent article today by Professor Justin Wolfers on Using Markets to Handicap Iowa. Obama is the favorite to win the Democrat vote with Romney and Huckabee neck and neck for the Republicans. Justin Wolfers shows that the markets are an excellent guide to election season.

But steady on says Brett Arends, also at the Wall Street Journal. He notes:

Markets are fascinating. I’m as absorbed by political betting as I am by the stock market — right now, maybe, more so. The prices tell stories. They contain wisdom and folly, clues and surprises. Respect them, by all means. But don’t revere them. The “crowd” isn’t always right.

Both authors note some drawbacks with the current markets (low liquidity and potentially absence of smart money). Either way the election kicks off today and it is going to be one exciting race.

Hat tip to Midas Oracle.

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“Making predictions is hard, especially about the future” said Yogi Berra but that doesn’t stop us trying.

ValleyWag and ReadWriteWeb have already announced their predictions for 2008 and they make for fun reading. The first golden rule to making new year predictions is to get the balance right between unobvious (ValleyWag’s prediction that the WSJ goes free didn’t exactly require Nostradamus like powers) but at the same time not too unlikely. There is definite kudos for nailing long shot predictions however you don’t want to end up with a list like Wired’s 2007 predictions (Google hits $1,000, Digg becomes the new Friendster and dads become biologically irrelevant).

John Battelle did much better with his 2007 predictions (YouTube to be integrated, Amazon to move into web services and Google to get significant negative press), which Robert Scoble recently reviewed. Of course he sometimes uses the second golden rule of making predictions which is to keep them vague and/or widely applicable (e.g. one major internet company will screw up on privacy/trust).

My modest suggestion for would be predictors would be that when making predictions ensure they are precise, testable and attached to a probability. The last one means we might be a bit more forgiving if it is a long-shot prediction. So taking ReadWriteWeb’s (RWW) and ValleyWag’s (VW) lists, and adding in some of my own (Hubdub) here are my predictions for 2008:

100% likely: Wall Street Journal to drop the pay wall (VW), Facebook does not get valued in a transaction at greater than $15 billion (Hubdub)

80% likely: Zoho to be acquired (RWW), Digg to be acquired (RWW & VW), SixApart gets acquired (RWW & VW), Facebook to remain independent (VW), Linden Labs to remain independent (Hubdub)

60% likely: YouTube announces HD (VW), AOL gets spun out (VW), Twitter remains independent (VW), Technorati enters the deadpool (VW), Tumblr to be acquired (RWW)

40% likely: Twitter to be acquired (RWW), Facebook to release a browser (RWW), Google Open Social to be a failure (RWW), Yahoo! has a major lay-off (VW), Perez Hilton’s TV show gets cancelled (VW)

20% likely: Facebook to decline in popularity (RWW),  Microsoft to buy Technorati (RWW), Google to hit $800 (VW), Jason Calacanis starts another project (VW), Microsoft buys Yahoo! (Hubdub)

Of course if all else fails and you get them all wrong you can always use the third golden rule: Brazen it out and forget all about your predictions.

Any one want to add to the list (or bid the percentages up and down)?

UPDATE: John Battelle has now published a rich list of predictions for 2008.

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Yes, that’s right make predictions!

I did a quick analysis on Google Trends to see how big the spike was for end of year predictions.

In the US there is a spike at the end of year, but also a clear spike in March. End of tax year adjustments? In the UK there is the same end of year spike but also quite a clear one in late summer. Any one got any ideas what causes this?

Anyway, happy holidays to all our readers.

Nigel

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In financial markets there is strong evidence to suggest that news gets priced into markets within 15 minutes of its release and sometimes even more quickly. Recent research into prediction markets suggests that they aren’t nearly as efficient with researchers from University of Pennsylvania showing that prices on IEM can be predicted using public news flow.

Doing a simple analysis of some the key events in the 2008 Presidential Elections against prices on Intrade shows that on discrete events there is a clear relationship between prices and news flow. However over longer periods the relationship is not always clear.

On the 4th of March CBS announced the results of a straw poll conducted at the conservative PAC convention in Washington DC. They picked Romney as their favourite. Romney’s price on Intrade lifted immediately where it stayed for about a week.

On the 11th of April the Fred Thompson revealed on Fox News and ABC Radio that he had been diagnosed with non-Hodgkin’s lymphoma nearly three years prior. The New York Times and other publications picked up the story the next day. Looking at his price chart shows he opened on the 12th of April at 19 but then closed at 15. The next day he opened at 11.2 but then closed at 17, as the story died down.

In both these cases, the news stories the media considered to be the important ones correspond with the news flow that traders thought was important.

However, the most interesting market movement of the year must be the Obama August slide. On the first of August Obama opened on Intrade at 35.5 but by the 24th of that month he had slide to 17.2. He continued sliding hitting a rock bottom of 10.7 on the 14th of October. 

The question is what was the news flow on Obama from the 1st of August to the 24th of August? Analysing the news articles in the New York Times suggests a disconnect between what was reported and how the market was reacting. Obama started August badly with a bungled comment on use of nuclear weapons. 

Additionally, his continued line that stabilisation of Iraq had been a ‘complete failure’ may also have cost him some points.

However in sum these news items don’t seem to correlate with an 18 point slide. This could lead us to two possible conclusions:

1. The New York Times didn’t report the most market sensitive news affecting Obama in August
2. Obama was over-sold in August and his price did not reflect his true value

I would love to hear your comments on the analysis in either the comments below or email me to nigel [~at~] hubdub [~dot~] com.

 Nigel

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Yahoo! have just launched a really cool dashboard for the 2008 Presidential Election. It presents data from polls, Yahoo! buzz index and Intrade (an Ireland based prediction market). If you are a rabid passionate Ron Paul supporter I suggest you don’t look at it, they’ve stuck him on page 2!

Coverage on TechCrunch.

Nigel

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One of the central design principles behind Hubdub is that people should be held to their public statements. Often a  blogger will predict a company will be a success or failure, however only very rarely does anyone ever check 12 months down the line whether they were right. What if you did check and you found out that blogger you thought was so insightful was wrong more often than he or she was right? Would you still have as much confidence in their predictions?

Three months ago, I made a prediction that Facebook would never see a valuation north of $6 billion (blogged here). Ooops. I guess I am in the hole on that one. But despite my prediction getting blown out of the water I think my analysis still holds. Plus more recently, some other bloggers have started to raise questions such as:

1. How good are your friends recommendations? (Not very says Professor Gita Johar)
2. Does Facebook obey Metcalfe’s law? (No says Cory Doctorow at Information Week, in fact I think Gresham’s law is more applicable)
3. Is Facebook playing fast and loose with user data? (Yes says News.com)

So while I am one prediction down, I’m going to double down on the next one. (Consider it the ‘I’m in a hole, time to get a bigger spade strategy’).

I predict Facebook will not see a valuation north of $15 billion in 3 years.

There, I said it, check back in 3 years time

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