The prediction market exchange Tradesports have themselves a little controversy over North Korean missiles.
I have written about prediction (or information markets) before.
Consider some future binary event like whether Hillary Clinton will be
the democratic nominee for president in 2006. One can create a
security 2008DEM.NOM.CLINTON that pays off $100 if Clinton wins the
nomination and $0 if she doesn't. Then allow trading on the security
including selling short. The price of the security will correspond to
the probability that the event will occur, and studies have shown that
these probabilities predict better, in general, than experts and polls.
Tradesports has such a security on Clinton and the price as I write
this for 2008DEM.NOM.CLINTON is 41.9 indicating Clinton has a 41.9%
chance of winning the nomination.
Tradesports had another security N.KOREA.MISSILE.31JUL that would pay
off if North
Korea launces a test missle that leaves North Korean air space by
July 31. As you might remember,
North Korea did fire test missles on the fourth of July. So it seems
like the security N.KOREA.MISSILE.31JUL should have paid off at
Here's the rub. The fine details of the contract required that the US
Department of Defense verify that the missiles left North Korean air
space. Tradesports couldn't get the verification so they expired the
security at $0.
Those who predicted
the North Korean missile launch lost real money on a technicality
which risks the accuracy of these markets. They no longer predict
whether a launch occurs, just whether the DoD would acknowledge it.
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