The reporter phrased prices in terms of the candidates’ percent chance of winning:
Traders … gave Democratic front-runner Barack Obama an 86 percent chance of being the Democratic presidential nominee, versus a 12.8 percent for Clinton…
…traders were betting the Democratic nominee would ultimately become president. They gave the Democrat a 59.1 percent chance of winning, versus a 48.8 percent chance for the Republican.
The latter numbers imply an embarrassingly incoherent market, giving the Democrats and Republicans together a 107.9% chance of winning. This is almost certainly the result of a typo, since the Republican candidate on intrade has not been much above 40 since mid 2007.
Still, typos aside, we know that the last-trade prices of candidates on intrade and IEM often don’t sum to exactly 100. So how should journalists report prediction market prices?
Byrne Hobart suggests they should stick to something strictly factual like "For $4.00, an investor could purchase a contract which would yield $10.00" if the Republican wins.
I disagree. I believe that phrasing prices as probabilities is desirable. The general public understands “percent chance” without further explanation, and interpreting prices in this way directly aligns with the prediction market industry’s message.
When converting prices to probabilities, is a journalist obligated to normalize them so they sum to 100? Should journalists report last-trade prices or bid-ask spreads or something else?
My inclination is that bid-ask spreads are better. Something like "traders gave the Democrats between a 22 and 30 percent chance of winning the state of Arkansas". These will rarely be inconsistent (otherwise arbitrage is sitting on the table) and the phrasing is still relatively easy to understand.
Avoiding this (admittedly nitpicky) dilemma is another advantage of automated market makers like Hanson’s. The market maker’s prices always sum to exactly 100, and the bid, ask, and last-trade prices are one and the same. Auction-type mechanisms like intrade’s can also be designed better so that prices are automatically kept consistent.