Intrade is a widely-cited prediction market. Intrade has a serious structural flaw. Intrade does not include the “time value of money’, making long term predictions less accurate.
Consider the 2012 US Presidential election. As of right now, the odds are (using the midpoint of bid and ask):
Obama wins – 54.6%
Romney wins – 39.3%
Gingrich wins – 2.5%
Paul wins wins – 1.9%
Others – negligible
Do you see the problem? The odds only sum to 98.3, rather than 100.
There’s a flaw with InTrade’s margin rules. If I wanted to place a bet, I have to place a margin deposit equal to THE WORSE CASE LOSS. I don’t get that money back until November. I don’t get credited with interest.
Consider Ron Paul. Realistically, his odds are zero. However, if I wanted to sell Ron Paul, I’d have to put up $9.81 to gain $0.19, and I won’t be paid until November. That would be an idiot bet. My effective interest rate would be around 2%. I’d be better off investing in the stock market or gold.
Also, I have counterparty risk. If Intrade declares bankruptcy between now and November, I lose my investment.
Intrade has a serious defect in its margin rules. You are required to deposit collateral equal to the worst case loss, and you aren’t credited with interest. That skews the odds for long-term predictions, like the November election. Longshots may be overpriced, because it isn’t profitable to sell them. The overall odds are skewed, because you don’t get credited with interest. Even if interest were credited at a rate of 1%-2%, that’s still lousy compared to other investments.