Can we all agree now that there's not so much wisdom in markets, or crowds?
The Supreme Court's decision to uphold President Barack Obama's health care reform law was surprising at least partly because a financial market had predicted that the opposite would happen, and financial markets can do no wrong. Crowds are wise. Markets are efficient.
Not so much, however, on the prediction market Intrade, where traders earlier this month assigned a nearly 80 percent chance that the Supreme Court would declare unconstitutional the health-care law's mandate that people buy health insurance. That had fallen to about 70 percent just before this morning's ruling, which is still a relatively sure thing.
But the individual mandate was of course upheld, meaning a lot of people making bets against it lost some money today. The contract price for betting on a mandate reversal has tumbled 97 percent today on Intrade. The mathematically inclined will note that's not 100 percent, meaning there are still some people out there assigning a very, very tiny chance to the possibility that:
A) we have all spent the past four hours reading the Supreme Court decision incorrectly;
B) the court will decide to revisit its ruling, breaking all historical precedent; or
C) Justice Antonin Scalia will build a time machine to travel back to 2005 and somehow make Harriet Miers the chief justice instead of John Roberts.
Anyway, the important thing is that Intrade's view on the health-care ruling was cited frequently in media coverage leading up to the decision. That helped to create the sense that the individual mandate was almost certainly doomed.
Not everybody was convinced. FiveThirtyEight blogger Nate Silver warned yesterday that Intrade traders were putting too much weight on the oral arguments in the health-care case, which turned out to be true. In fact, Intrade traders were paying too little attention to clues in those same oral arguments that suggested Roberts might uphold the mandate by calling it a tax.
As Joshua Keating of FP Passport points out, traders once again revealed themselves as having no more wisdom than the average schlub about anything. Sort of like the stock market is not always a perfect mechanism for predicting the future -- recall that the Dow Jones Industrial Average hit its all-time high just two months before the Great Recession began.
And Intrade specifically has gotten many, many calls wrong, Barry Ritholtz reminds us, from Howard Dean's primary loss to Michael Jackson's trial results.
Intrade is a useful guide to conventional wisdom, which in this case was also dead wrong. But hopefully more people will eventually realize it offers no special insight just because it's a market. That goes for you, too, supporters of President Obama, whose re-election odds today on Intrade are at 54 percent.
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