Don’t Trust Prediction Markets in the Final Hours

After the polls closed in Texas last night, the DEM.TX.OBAMA contract on InTrade – the one judging his chances of winning the Texas primary – spiked up to 85, before embarking on a long and steady decline to zero. Clearly InTrade got Texas wrong: Obama had been the market favorite for weeks. But equally clearly last-minute trading frenzies are simply not to be trusted. Justin Wolfers might still believe that later prices are always better than earlier prices; I think it’s becoming increasingly clear that an exception must be made for the final 24 hours or so of any political contract.