Educational, eh?
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This is interesting. They have been operating iPredict since 2008, but apparently got a "no action" letter from the Commodity Futures Trading Commission in the US to allow US participants in the market (as long as they limited the markets in the same way Iowa University does for the IEM) 4 months ago.
The market isn't particularly efficient. For example, if you bought "No" on all the presidential candidates to win, it would cost $16.16, but would be worth at least $17 for a 5% gain. Of course, after paying the 10% fee on profits and 5% withdrawal fee you would be left with a loss, which is why this opportunity still exists.
The market isn't particularly efficient. For example, if you bought "No" on all the presidential candidates to win, it would cost $16.16, but would be worth at least $17 for a 5% gain. Of course, after paying the 10% fee on profits and 5% withdrawal fee you would be left with a loss, which is why this opportunity still exists.
Does this affect the accuracy of the market? Serious question; I do not understand the nitty-gritty economics very well.
Does this affect the accuracy of the market? Serious question; I do not understand the nitty-gritty economics very well.
Yes. Think of the transaction costs as an upper bound on error. Any wrong beliefs that are off by more than the transaction costs are "free money" to correct, and thus people will spend time and effort looking for and correcting those errors, but any wrong beliefs that are off by less than the transaction costs cost money to correct, and so won't be corrected.
For example, suppose there were a 6% difference between reality (here, the union of mutually exclusive and exhaustive options) and the market. Then the 10% profit fee would drop that down to 5.4%, and then the 5% withdrawal fee would drop that down to 0.4%, and there would be an opportunity to make money--until the price had shifted so the difference between reality and the market was 5%.
(If you already have money in the system, and thus the 5% withdrawal fee is a sunk cost, any mispricing is worth correcting. Putting money into the system is what the withdrawal fee disincentivizes, and so only mispricings more than 5% will attract new money.)
[Edit]And, of course, the fact that the contracts are not instant adds further costs. Yes, you could buy up the contracts and get a certain 0.4% gain (in the previous example), but if that's a certain 0.4% gain six months from now that may actually represent a negative real return, and thus the actual error upper bound is even higher.
It directly affects your error estimates. If by "accuracy" you mean "forecasting capability" then inefficiency is a symptom of underlying problems (e.g. too few market participants) which do affect accuracy.
From their website:
PredictIt is an exciting new, real money site that tests your knowledge of political and financial events by letting you make and trade predictions on the future.
Taking part in PredictIt is simple and easy. Pick an event you know something about and see what other traders believe is the likelihood it will happen. Do you think they have it right? Or do you think you have the knowledge to beat the wisdom of the crowd?
The key to success at PredictIt is timing. Make your predictions when most people disagree with you and the price is low. When it turns out that your view may be right, the value of your predictions will rise. You’ll need to choose the best time to sell!
Keep in mind that, although the stakes are limited, PredictIt involves real money so the consequences of being wrong can be painful. Of course, winning can also be extra sweet.
For detailed instructions on participating in PredictIt, How It Works.
PredictIt is an educational purpose project of Victoria University, Wellington of New Zealand, a not-for-profit university, with support provided by Aristotle International, Inc., a U.S. provider of processing and verification services. Prediction markets, like this one, are attracting a lot of academic and practical interest (see our Research section). So, you get to challenge yourself and also help the experts better understand the wisdom of the crowd.