Wednesday, November 7, 2012

No Law of One Price in the Presidential Betting Markets?

Uber-Efficent market types love to proclaim how the market is the most efficient and wise at setting the odds for anything, including the Presidential elections. But if that market is so efficient and wise, why does the Law of One Price not even hold?

From Ezra Klein, October 30th:
... BetFair markets give him a 67.8 percent chance, the InTrade markets give him a 61.7 percent chance...
Why wasn't this arbitraged away? You could put $61.70 on Obama winning at InTrade, with a $100 payoff with a win, and $32.20 on Romney winning at BetFair with a $100 payoff. And for a total of $93.90 you could get a guaranteed $100 a week later.

Why didn't people jump on this until it was bid away? According to Daily Kos:
The gamblers know about the existence of Intrade. They talk about how it isn't worth it to them to try to take advantage of the market inefficiency. They detail the process involved with trying to get a deposit on...

The gamblers also know about the existence of 538. Most knew Nate's work from baseball prior to politics. His work was very helpful for gamblers. Those people who tailed him profited. He has done some good work in other sports like soccer as well. He had models for entertainment betting as well (film awards and such). His work on politics made a lot of people money too. Senate races and presidential race in specific states were mispriced. (This was partially a loss-leader for the big websites, a known mispricing without that much exposure. Offer Senate races priced at 95% when they were really closer to 100%, but only at low limits. Max win from any race was $50. You'd have to tie up a grand to get that $50. Many sportsbettors had thousands tied up as they took all the huge favorites available.) Even by blindly following his numbers, you made money.
Update: Ravij Sethi informed me of a great post at overcommingbias on why arbitrage is difficult, and limited, to enforce the Law of One Price. Quoting:
Some noteworthy aspects of the situation are:

    – Americans can’t deposit money into Intrade using credit and debit cards – they have to use bank transfers.
    – Bank transfers take at least two days to arrive and cost over $20.
    – Everyone else can choose between cards and bank transfers.
    – Cards are instantaneous and free (if denominated in US dollars anyway) but have a $2,000 deposit limit in the first month, and $5,000 thereafter.
    – It takes at least a day, probably two, to open a new Intrade account and have it approved.
    – There are other significant barriers to entry – knowing about the issue, learning about the fees, opening an account with another betting agency and finally having the time and confidence to correctly place the hedge.
    – Intrade seems very widely covered by the US media.