Prediction markets

Perhaps the best thing about markets is their ability to harness collective wisdom. Prices are often set by literally millions of people each giving their input as to the value of a particular product. Seeking to take this a step further, recent years have seen the creation of prediction markets, in which people put their money where their mouth is and bet on the likelihood of particular events occurring. One event that people bet on this year was the U.S. election. The prediction markets were highly accurate, outperforming many pundits:

On the morning of Election Day, I printed out the expectations from the Dublin-based Intrade market as well as a roundup of predictions from nearly two dozen political consultants, journalists and academics that appeared at the Huffington Post.

The Intrade bettors expected Mr. Obama to end up with 364 votes in the Electoral College — one less than he actually got. None of the pundits came so close. Alan Abramowitz, a political scientist at Emory, came closest with prediction of 361; all the rest were off by at least 12 votes. Nate Silver, the much-talked-about statistician at FiveThirtyEight.com, underestimated Mr. Obama’s tally by 18 votes. Many of the pundits underestimated Mr. Obama’s total by more than 25 votes, like Chris Matthews, Arianna Huffington, and the strategists Paul Begala, James Carville and Alex Castellanos.

When reading this I was reminded of an episode a few years ago in which the Pentagon decided to create a prediction market called the Terrorism Futures Market, that would -- as the name implies -- try to predict the likelihood of future terror acts. It was the kind of bold and creative thinking that you don't typically associate with government. Of course once Congress got wind of the whole thing they quickly moved to shut it down. What a shame.

Update: Looks like a couple of pundits were on the money.