The Dummies Guide to InTrade and Prediction Market Margins

I've decided on a Mother's Day present—all my InTrade shares on Hillary Clinton. And because I'm such a good daughter, I'll throw in Ron Paul too.

InTrade is the online prediction market . They have even surpassed Vegas in the types of things which can be wagered—whether OJ Simpson will be acquitted, first Hurricane of the season, whether Britney will go back to rehab this year, etc.

Actually, in many cases the forecasting has been astonishingly accurate. This is due to the law of mob wisdom. If large groups of people, from diverse backgrounds, with various abilities and information, are actually putting something of value behind their opinion, the consensus line is a pretty good soothsayer. Economists, who did not get their degree from the University of Moscow, have always known this.

But, just like the commodity futures market does not necessarily reflect the actual value of pork bellies, the role of the laws of Stupidity, Enthusiasm, Greed and Texas Hold em, must be considered.

For example, at one point InTrade investors gave Ron Paul a 10% chance of being elected president. The only place such a probability ever really existed, was in the minds of some of his more deluded supporters, and in the land of wistful, wishful thinking which many of us inhabited in the heady days before the first primary.

Most of the money on Ron Paul, came from saps like myself who got caught up in the heady possibility that America just might, maybe, hopefully be ready for the truth, and a return to the principles and ideas that initially made the American Experiment so attractive and promising.

But, there were also those who coldly watched and purchased Ron Paul shares, as throngs of people threw off apathy and opened their pocketbooks in pursuit of a dream made possible only by the human capacity for faith—just as many tithe ten percent of their income to a particular church, with unshakable conviction that their brand of religion alone has a monopoly on universal truth and personal salvation.

And all those objective investors , if they did not cash out before Iowa, certainly did so before the New Hampshire primary. These individuals were simply taking advantage of a corollary of the Laws of Greed and Stupidity—a fool and his money are soon parted.

At this point no one should place a bet on Obama. He is overvalued because a large portion of the country is drunk on an exhilarating elixir of Obamarma. There is a feeling, except in the mind of Barack, who is a shrewd politician, that a wave of change has overtaken America, and all the voting patterns that have elected American presidents for the past sixty years are out the window.

Hillary Clinton is vilified for pointing out that Obama can't get the support of the “bitter people”—white blue collar workers. Well, that is the essential swing vote in presidential elections—and it is ignorantly lame to call it the old politics of race and class, and pretend it no longer exists. Almost all of us wish that was the case—but it is not, and it will not be any different in November. However, if you are convinced that the golden tongue of Barack can sway the bubbas of the not-so-deep southern states—place your bets.

But, with all the mob intoxication over Obama, it would be an excellent time to purchase some shares of John McCain , who was going at 38 this morning. And I would hold on to them, until some good polls were indicating that Honest John was headed for a defeat in either Ohio or Pennsylvania—or if you are super cautious, best unload them the day after the Republican convention.

You can see how some of us, who were well trained in the art of bookmaking by our fathers, will play the margins. And we will also be a factor in artificially inflating the odds of something happening, and bail out when it looks like safe or optimal profits have been acheived.

That is what is happening with oil right now. All the people who ruined the economy playing the securitized mortgage game are now investing in oil. Only an idiot, or a paid libertarian lobbyist, thinks that supply and demand has caused a 30% increase in the value of oil since Christmas.

This time, rather than Residential Housing Ponzi, a game of poker is going on. There are a lot of devalued dollars fleeing Wall Street and running after barrels of oil. The players are trying to determine that opportune moment right before the other guy winks, and they should fold and take their chips to the cash out window.

The oil companies know this. In a recent survey the majority of oil execs predicted a barrel of oil would be going for $100 by the end of the year. So in the end , after this most recent bubble of greed pops, the market will reflect the true value of oil, which has increased due to demand, but just not to the extent that we are all now suffering through.

Overall, markets are accurate—just like the InTrade wagering will be. They are just not good predictors at any particular moment.

In making InTrade investments the effect of Vegas, and the organizations your local bookie represents, must be taken into account.

Prediction markets, especially sports, but increasingly everything under the sun, are invariably bound by the large sums of money that are thrown at bookies . If the Vegas line is trading at an InTrade equivalent price spread , then anytime the InTrade price goes outside of that range there is an arbitrage profit-- gamblers will go long with the bookies and short on InTrade.

In sports, the bookies set the line, and InTrade follows. However, all that may change as the paradigm of gambling and prognostication investment morphs with the growth and popularity of InTrade and similar markets—especially if the market is ever unleashed by eliminating federal wire fraud prohibitions which dampen participation.

Yes, you should be aware, unless you are placing your bets directly in Vegas, the stock exchanges, or commodity markets, all of this is illegal in a country that would greatly benefit if the water supply was spiked with Zyprexa. In America, it is preferred that you throw your money away on state lotteries or senselessly drive up the price of household staples.

I am sure that somewhere along the line some zealous officials from the Justice Department will start busting InTrade investors and civilly forfeiting profits.

I'm so sure, I think I'll go online and put my money where my mouth is.