Did Prediction Markets Get Chicago Wrong?

Alex Tabarrok points to a critique of prediction markets, regarding the fact that betting markets had Chicago being the favorite to win the 2016 Summer Olympics over Madrid, Rio, and Tokyo.

Why were the odds so awry on the 2016 hosting city? I had assumed Rio would win in a walk, and yet, as shown in the following figure, Chicago was the favorite among oddsmakers.

I normally wouldn’t have much to say here, but I just happened to be following the prediction market on Friday morning quite closely. I was scheduled to go on CNBC to talk about the economic impact of the Olympics if Chicago was elected. It takes me about an hour to get to the studio, so I wanted to know the likelihood of making the trip, and I became fixed on the market for the morning.

Around 9 am, a friend sent me this picture of the InTrade betting market on who would get the games.

Odds

The odds show Chicago to be the favorite with a 53% chance of winning, closely followed by Rio at 46%, Tokyo at 3%, and Madrid at 2%. Like all the pundits following the selection were saying, it was a race between Chicago and Rio, but was very close to call. These odds also show something else, Chicago was trending down and Rio was trending up. The trend would continue for the next few hours. And I happened to record these changes on my Twitter/Facebook pages.

10:50am: “Intrade Olympics futures market has Rio rising and Chicago falling to a dead heat.”

11:17 am: “Intrade futures market: Chicago shares selling for 30, Rio 53.”

About 10 minutes later, Chicago was out. Looks like useful information was leaking out from knowledgeable parties just before the vote. This is evidence for, not against, the strong-form of efficient markets hypothesis.

But, then we have the question: if Chicago had such high odds, how did it get knocked out of the running first?

[Update 8/3/2009] A few people have asked why I think the odds were all that awry, when they implied that Chicago was only a slight favorite over Rio. True enough, but Chicago went out in the first round, Tokyo in the second, and Madrid in the third, implying that Chicago was the fourth choice of the IOC among the finalist cities, not a slight favorite for first.

This can be answered by the voting mechanism used and the coalitions favoring each region. Here are the vote tallies by round.

City	Rd. 1	Rd. 2	Rd. 3
Rio	26	46	66
Madrid	28	29	32
Tokyo	22	20	
Chicago	18		
			
Total	94	95	98

There is clearly a Chicago/Rio coalition here, where a group of IOC members favored these two cities over the other two cities. In the first round, Madrid had the most votes; but once Chicago was eliminated, Rio took a commanding lead. The rise in 20 votes corresponds to receiving all the 18 Chicago votes, plus the addition of the two US delegates who were eligible to vote once Chicago was out. This coalition is a natural fit because both Chicago and Rio would both serve prime-time television markets in the US to maximize sponsorship revenue. From this perspective, it’s obvious that the Madrid and Tokyo never had a shot, and that it only took a few members of the tightly split coalition to be swayed one way or the other. If five members had changes their votes, it’s Rio who’s ousted in the first round, not Chicago. It seems that the swing delegates held their cards close to their chests (or hadn’t decided yet), but something that morning—maybe it was a tie color, a handshake with key people, or a whisper—tipped off investors trading in the InTrade market. I see this as a win for prediction markets, not a failure.

7 Responses “Did Prediction Markets Get Chicago Wrong?”

  1. crack says:

    So if you need info literally minutes before it’s useless go with the prediction market.

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