04 March 2008

04 March 2008 - Super Tuesday, Part II

A couple of days ago, Intrade, the online prediction market, put Hillary Clinton's chances of winning the Democratic Party's nomination at about 10 percent. In the past 24 hours, in the wake of poll data suggesting she may have re-taken the lead in Texas, she has risen above 20 percent. Since Intrade trades futures contracts, these percentages are expressed in prices: a contract of 10 units costs $1 (1 unit = $0.10) and that contract will pay 100 units if the outcome it predicts comes to pass.

I've believed for the past few weeks that any Clinton contract falling below 40 is a bargain at the price. She's lost many contests in a row to Obama, but these were elections she never expected to win, while the big states of Texas, Ohio and Pennsylvania still loomed and all favored her. Plus, win or lose tonight, she's got nearly as many delegates as Obama. Momentum or no momentum, either one of them can make the case for their party's nomination.

One of the reasons Clinton's done so poorly is that Americans are barred by law from using their U.S. credit accounts to buy Intrade's contracts. It's a form of online gambling, you see, so in order to play you either have to send a check to the company or use an overseas account. The result is that much of the trading, I reckon, is done by foreigners, who have to rely on the U.S. media for information. The Intrade prices are therefore more a reflection of media attitudes than political reality.

Intrade offers contracts on other events, such as the ongoing conflict in the Middle East. You can decide to buy contracts that will mature if Hamas recognizes Israel by the end of March (1.5), the end of June (1.0), or the end of September (3.5). Prices for Olmert's resignation are a bit higher, with the September contract fetching 10 units. A contract on an Israeli-Palestinian peace treaty by the end of George W. Bush's term in office is going for 18 units as of today.

18 is a lucky number to many Jews--it's the numerological equivalent of חי, the word for life. But it's a pretty poor price. In fact, the one thing that all of Intrade's Middle East markets agree on is that the prospects of peace are pretty dim. The peace treaty contract has never traded above, or even near, 40. And keep in mind that these prices are probably more powerful predictors than the American election prices, assuming that people in the Middle East aren't barred from Intrade.

Here's one way to encourage the peace process: if we're going to force Israelis and Palestinians to do anything, let's not force them to accept U.S. troops, as Barack Obama's adviser Samantha Power seems to have wanted to do. Rather, let's make both sides spend large percentages of their government budgets on Intrade peace treaty contracts. To reap the profits--and avoid total, catastrophic losses--both sides will have to make the treaty happen.

I'm joking, of course. This sort of carrot-and-stick thing has been tried before--not on the prediction markets, but through diplomatic intervention that promised U.S. aid as a reward for peace. There have been two problems. One is that the U.S. has paid off these contracts before they have matured, giving the Palestinians massive amounts of economic and military aid before they have stopped terror. The other problem is that there are people in the region buying contracts for the total annihilation of Israel, and expecting them to mature in the afterlife, or in the lifetime of some distant generation.

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