Intrade's "Obamacare" contract: how much does it really tell us?

I am generally a big fan of prediction markets like Intrade.  I find them to be a great way to get a quick read on how future events are likely to play out.

My feelings on this subject are one reason I have been following Intrade's health care reform ("Obamacare") contract over the past few months.

Lately, though, I have started to question the information value of the contract's trading prices.

The contract currently suggests that there is about a 75 percent chance that the Democratic health care reform package will be passed by June 30th of this year.

Frankly, this seems quite a bit at odds with a wide range of estimates ("whip counts") currently out there about who is likely to vote no and who is likely to vote yes on the reform package.  (See, for example, this detailed whip count .)

Now, don't get me wrong.  I am not saying that the various whip counts predict the imminent demise of the current reform package.  But most counts of definite "yeas" and "neas" have the "neas" noticeably exceeding the "yeas," and even counts that allow for a more subtle assessment of the situation suggest that passage of the package is far from a done deal.

Why the disconnect?

Well, one obvious reason might be that those of us not intimately involved in the current reform package negotiations simply cannot fully appreciate how far along those negotiations are.  Individuals closer to the process may recognize that the package's chances are quite high, and may be leveraging this information by buying the contract (and thus causing its price to go up).  In fact, Intrade's CEO has been quoted as saying that a lot of the recent trading volume in the health care reform contract is coming out of Washington DC.

But I wonder if there are other explanations which tend to diminish the value of this contract as a predictor of what's going to happen with the Democratic plan.

First of all, note that volume in the contract is not particularly high.  There have been only a few days where volume reaches into the several hundred contracts.

The low trading volume, however, means that it doesn't take much to move the contract's price in one direction or the other.  And I think there are at least two factors that might be causing the volume in recent weeks to support upward exaggeration in the contract's price.

One factor is, I believe, that the White House and Congressional Democrats have made a concerted effort in the past few weeks to convey the impression that the reform package's chances are much higher than they actually are.  I will write more on this strategy and its objectives in a later posting.  I think many observers will agree, however, that Democratic publicity in favor of the reform package has been much more extensive in the past few weeks, without any commensurate increase in publicity opposed to the package.  This publicity may well be causing Intrade traders to overestimate the likelihood of reform's chances of passing.

This first factor has been amplified, I suspect, by a second factor, which is that buyers and sellers of Intrade contracts are -- I suspect -- more likely to be supporters of the President and his reform efforts than opponents.  I assume that Intrade traders have noticeably higher incomes and education levels than the average American, and people with that demographic profile supported the President quite strongly in the last election.

If my assumptions are correct about Intrade buyers and sellers and their political leanings, the recent Democratic publicity campaign may have had a particularly amplified impact on the health care reform contract, as Intrade traders allowed their investment activity to be influenced by their desire to have the President and House Democrats succeed.

Now, I realize that I am, in essence, arguing that Intrade traders are making irrational investment decisions.  And that's not an argument one should make lightly if -- as I do -- one believes that market participants tend to act in accord with their economic and financial best interests.

But I think there is relevant precedent when it comes to Intrade and contracts tightly associated with President Obama.  Consider the Intrade contract for whether or not the 2016 Summer Olympics would take place in Chicago (North America).  The image below (hat tip ) shows the last month of the contract's price and volume history.

President Obama made a strong public commitment to Chicago and its campaign to be the 2016 host city.  This public commitment may have influenced Obama-friendly Intrade buyers and sellers, who had the contract trading at levels as high as 65 in the days leading up to the site city selection decision.  Nevertheless, the decision ended up going against President Obama, causing the contract to lose all of its value.

Note, as well, that this contract was traded even more heavily in its final days than the current Intrade health care reform contract.

There is, of course, one final possible explanation for a disconnect between the current trading prices of the Intrade health reform contract and the actual chances of health reform passing.  It is possible that the contract's value is being manipulated to make it seem that support is building for the Democratic plan.  There is no public data, however, on who is buying and selling the contracts, so we can only speculate as to whether or not manipulation is taking place.

Anyone willing to call up Intrade and ask whether George Soros has an account with them?

(For what it's worth, this posting argues that it is unlikely the Intrade contract is being affected by either insider trading or manipulation.  To be honest, I'm not fully convinced by the arguments.)