The Shortcomings of Intrade Gambling on the GOP Primary

Via Ritholtz, the New Republic:

InTrade, for those unacquainted, is a website where betters trade “contracts” on whether an event, from a raised debt ceiling to a Charlie Sheen arrest, will or will not occur. If the event comes to pass, the contract pays out $10 to its owner; if it doesn’t, the contract becomes worthless. For example, if lots of people think that Mitt Romney will get the nomination, a contract predicting as much will be in demand, and its price, translatable into a probability, will go up accordingly. The idea—using the same collective judgment that sets prices on Wall Street to forecast the future—is tantalizing, and many media outlets have been serving up spreads from the website for months now, including Dave Weigel, The Hill,Bloomberg, Salon, The Spectator, and even the venerable quant Nate Silver. Business Insider is the most enthusiastic; last Tuesday following the GOP debate, it reproduced the latest InTrade numbers under the headline, “Ranking the Republican candidates: Here Are Their Odds Of Winning.”
But in the context of the GOP nomination, InTrade simply isn’t up the task. The first and biggest problem with the predictions market is its tiny trading volume. As of this piece, the site reports that only 74 contracts were traded on Monday on the nomination of frontrunner Mitt Romney. Moreover, the bets wager no more than $4 apiece. In other words, in a barely-begun race between many candidates, there simply isn’t the volume or risk necessary for InTrade’s market to work its supposed magic. As Yale economist and electoral predictor Ray Fair explained to me, this is the site’s Achilles heel. In general, Fair says, low volume is a problem for all the bets placed on the website, but “for small contracts like [the GOP nomination], it’s even worse.” Mark Perry, a University of Michigan-Flint financial economist and American Enterprise Institute scholar, agreed, arguing that “with a thin market like that, you have less information transmitted through the odds.” And financial journalist Felix Salmon made the same argument to explain why he quit the site. 

They go on to make another couple good points.  This really is more about entertainment than actual prediction, but it plays to people's bias that markets can be rational predictors.  I don't buy it.