It is very popular for people on this site to quote Intrade (and Iowa Elections Market) as if it matters. The general idea that a market of this sort measures the Wisdom of Crowds is certainly powerful one. There is a frontpage article that is touting an averaged Intrade/IEM/Betfair number. Betfair is the only one of the three that matters.
I think it is not wise to put too much stock in the Intrade price.
I'm going to compare it to the gold standard for internet sports betting, Pinnacle Sports.
Intrade is not an efficient market. Only tiny amounts of money are wagered, with significant barriers to entry. Because of these barriers, a large arbitrage price exists. The mere existence of a stable arbitrage price should be very worrisome.
[Insert cutesy joke about the orange squiggle here.]
[Disclaimer: You cannot legally use Pinnacle in the US. Some people have devised ways to get around this. Some of these people have been caught and actually arrested. The DOJ's position on the matter is clear. Several sportsbetting and internet poker sites have been seized by DOJ, even though they were not housed in the US, even though they were clearly legal in the jurisdictions where they are housed, and even though they had non-US customer bases much larger than their US clientele. 2007 was probably the most recent date where you could feel that it was a murky area whether or not internet sportsbetting in the US was legal. The legality of Intrade in the US is less clear. Of note, nowhere on the Intrade site do they claim that you can legally use them from the US. They advise that you are responsible for determine the legality in your own location.]
Here are the TLDR cliffnotes:
Intrade is a toy market. It isn't efficient enough to reflect a crowdsourced opinion. If you want that, then turn to Pinnacle (and to a lesser extent Betfair). These have consistently shown that Obama's percentage win is gauged in the high 70s. If Intrade says it is 65%, and Pinnacle says it is 78%, trust Pinnacle. Not because it gives you the answer that you like, but because it reflects the crowdsourced opinion of people backing their opinions with hundreds of thousands of dollars.
Pinnacle Sports (from now on=Pinny) is the gold standard of internet sports books. Their business model is to offer wagers with low vigorish (house cut). They allow increasing bet sizes as the event draws near. They use the bets placed to "sharpen the line". This actually employs the sharp handicappers to make their line for them. These "sharps" who are devoting a lot of time and effort on a particular contest will place repeated wagers at the relatively low early betting limits. ("Low" here still means thousands of dollars. More money has been wagered today on Pinnacle in the US Presidential election than in TOTAL on Iowa Election Market this year. The betting limit on the Presidential race on Pinny was $20,000 two weeks ago. Don't know if it has increased since then, since you can only see the current limit if you have an account. Note that this $20K is a "soft" limit. You can bet more than that, but you have to do it in $20K chunks to give them a chance to adjust the line after each bet.)
When another betting outlet (website or brick and mortar...legal or illegal) has a sufficiently different price available, then an arbitrage situation exists. You can back one result at site one and the opposite at site two. Provided that the discrepancy is enough to overcome any fees involved, you have an automatic profit. These situations do not last for very long. People are making a living doing nothing more than arbitrage. After you have put as much money as you care to tie up into the arbitrage, then you tell your friends about it. If you've run out of friends :) and the arbitrage is still there, then you share it with your cyberfriends on a gambling forum/bulletin board/mailing list.
An arbitrage position stably exists at Intrade compared to Pinny. This is because there are very significant barriers to entry at Intrade. You probably cannot fund by credit card. You cannot fund by PayPal or MoneyBookers or Neteller. You can mail them a check. You can wire the money with the associated fee.
Sportsbettors want to be able to put down thousands of dollars on short notice. For many of them, this is their job. If you think that Obama is 80% to win the election, and you can buy at 67%, then this is a huge edge. However, it isn't as big as you might think. Your profit only reflects the mispricing. You risk $200 to win $100, but your profit isn't actually $100. Your profit is only the difference between the offered price and the real price. A $200 bet should have paid back $50, not $100. That $50 difference is your profit. This is a huge edge, and sportsbettors are used to dealing with edges in the single digits. It might cost $40 to wire the deposit to Intrade, they charge you $5 a month to have an account, and they charge you to withdraw your money. All the edge is now eaten up. And this is a situation with an astoundingly large mispricing.
The gamblers know about the existence of Intrade. They talk about how it isn't worth it to them to try to take advantage of the market inefficiency. They detail the process involved with trying to get a deposit on. It may seem very foreign to most readers here, but the professionals are not trying to bet $10 or $50 or $100. They are trying to bet thousands or tens of thousands of dollars. Just read on one my sites today about a bettor who gave up. He used to have an Intrade account previously that he let go dormant. He wanted to reopen it. They asked for a copy of ID and two documents to prove address, which he provided. They set a $1000 deposit limit. They had a $6000 limit in 30 days. He emailed to try to get his limit increased, but they wouldn't do so. (He was looking to bet 5 figures.) He tried to fund via credit card (living in a place where it is legal to do so). They denied him, even though he uses his credit card at other gambling sites. He won't be betting there.
The gamblers also know about the existence of 538. Most knew Nate's work from baseball prior to politics. His work was very helpful for gamblers. Those people who tailed him profited. He has done some good work in other sports like soccer as well. He had models for entertainment betting as well (film awards and such). His work on politics made a lot of people money too. Senate races and presidential race in specific states were mispriced. (This was partially a loss-leader for the big websites, a known mispricing without that much exposure. Offer Senate races priced at 95% when they were really closer to 100%, but only at low limits. Max win from any race was $50. You'd have to tie up a grand to get that $50. Many sportsbettors had thousands tied up as they took all the huge favorites available.) Even by blindly following his numbers, you made money.
Hundreds of dollars are being risked at Intrade. Hundreds of thousands of dollars are being wagered at Pinny. Orders of magnitude difference. It is easy (for much of the world) to get money on Pinny. It is difficult to get money on Intrade. When their prices differ so significantly, you should believe Pinny rather than Intrade unless you have a strong reason not to. No such reason exists that I can fathom.
Pinny's price over the last week has moved in Obama's direction. The highest price I've seen in -353. (You have to risk $353 to win $100.) That represents a 78% chance of Obama winning. The price has been bet back and forth extensively. It has stayed in the 73-78% range, though. The price as I'm typing this is -333. That's 76.9%.
Some people will let their hearts get in the way of their betting. In inefficient markets, this leads to crowd favorites being priced too high. The local bookie in Chicago may end up offering a significantly higher price on the Bears. This will certainly be in play in political markets. In an efficient market, this tends to be minimized by those people who care more about their bank account. In an inefficient market like Intrade, this can still exist. I think that this is the biggest reason for the mispricing. Enough people who are on Intrade WANT Romney to win strongly enough that it colors their perceptions and they convince themselves that Nate Silver is wrong. It is not enough money that it hurts them in any event. Because of high barrier to entry, those people who are more objective cannot buy back these mistakes.
Gaming the market? It might be possible to create a narrative by changing the price by placing multiple bets. This looks like it was done at Intrade a couple of weeks ago, when there was a big surge on Romney. Moving from 65% to closer to 50%. Mostly all from the same account. Since it is difficult to get a lot of money on the site, this might have been planned ahead of time. Because the amounts are so small (a share of Romney at 30% costs $3), you can buy/offer a ridiculous number of shares for what is chump change in politics terms. Cheaper than an ad buy, and helps you drive the narrative perhaps. You can now suggest that there is Mittmentum because the bettors at Intrade think his stock is rising. Astroturfing as applied to crowdsourcing. It would literally take hundreds of thousands of dollars to do this at Pinny, and the price would not last for very long. Your window for narrative would be tiny.
Pinnacle website with the presidential betting line is here:
http://www.pinnaclesports.com/...
The number you see there probably doesn't mean anything to you if you are not a gambler. If it looks like this: -330, then that is called a moneyline. If it is written 1.3, then that is decimal odds. To convert them to a corresponding percentage, use a calculator like the one here:
http://www.sbrforum.com/...