The visible hand in economics

iPredict and prediction markets

Posted on: July 21, 2008

Just been looking at the blog of the iPredict internet venture (site here, blog here). It looks like interesting stuff, and is definitely a good way of illustrating the “wisdom of crowds”.

One thing that did excite me was a “recession contract” (blog post here, contract details here). If it turns out that we have had a recession over the first half of the year then each share pays out $1 – otherwise it pays out zero.

As a result, you lose if March is revised up, and/or if the June quarter experiences real growth. While it seems quite likely that we have had a recession, the current contract price is $0.8661, which sort of implies that the market is pricing in a 86.61% chance of a recession. This appears to be a touch high – given that none of the partial indicators are actually out yet.

However, with petrol prices up 7% over the quarter, indications the drought will have reduced agricultural volumes further, and the fact that inventories in many industries were at high levels in March (and the market is working with production, not expenditure, GDP) I suppose betting that there was a recession is fairly safe money 🙂

The main risk in my mind isn’t that the June number will be negative, but that March might be revised up into positive territory! You just can’t trust those danged seasonally adjusted numbers 😉

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1 Response to "iPredict and prediction markets"

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