The Wisdom of the Crowds and Neutralizing Bin Laden

May 5th, 2011

Intrade, a leading prediction market, accepted odds on whether Osama Bin laden would be “captured/neutralized before midnight ET on 30 Sep 2011.″ How accurate was it? Economix has the breakdown:

Let’s say you saw Bin Laden/September 2011 contracts trading on April 22 at 3.8 points, which means the markets thought that there was about a 3.8 percent chance that he’d be caught by this coming September. You might have bought the contract because you thought the market was underestimating this chance. By late last night you would have found out you were right, and the contract would have closed, or settled, at 100 points.

The settlement point price minus your purchase point prices, then multiplied 10 cents, equals your profit. So when the contract traded from 3.8 to 100, you gained 100-3.9 = 96.2 points. Multiply that by 10 cents, and you get a $9.62 profit for each contract you’d purchased.

If you’d been wise enough to buy these contracts in bulk, as you might for a stock — and alas, the volume traded on this particular Intrade market was quite low, so few were thinking along these lines — you could have made a pretty penny.

Just goes to show that with imperfect information it’s hard for markets to be terribly efficient.

H/T Andrew G. on FB.