Tuesday, September 07, 2004
Inefficiencies in Iowa Electronic Markets
An excellent post by Daniel Davies can be found on Crooked Timber. The post is fairly technical, and refers rather obliquely to the Black-Scholes model for pricing options, but even if you're only passingly familiar with economics, it's an interesting read. Basically, the prices in the Iowa Winner-Take-All and Vote Share markets are hard to reconcile, and the prices within the WTA market even offer a (small) free lunch, strongly suggesting these markets are inefficient. As Davies points out, this undermines the analogy to large financial markets that IEM wants us to buy into; instead, we could think of the IEM as a particular (but not necessarily optimal) way to aggregate opinions.
Not that this is the fault of the IEM people---if market participants could put up real amounts of money, the IEM would likely function much better. But the powers that be have nixed that option.
Not that this is the fault of the IEM people---if market participants could put up real amounts of money, the IEM would likely function much better. But the powers that be have nixed that option.
