The IOC recently selected Rio de Janerio over three competing bids to host the 2016 summer Olympic games. The Chicago bid was favored in public prediction markets, with prices at Intrade between 50 and 60 at the time of decision and prices at Betfair implying about a 50 percent chance. Did the prediction markets fail to predict well?
At Midas Oracle, Chris Masse has been asserting that prediction markets for IOC selections are fundamentally flawed, saying that the IOC is a small, secretive committee that doesn’t leak information and therefore no information is “out there” available to be aggregated by a prediction market. He was saying this before the IOC vote, too; this is not just after-the-fact speculation, it was his before-the-fact speculation. (Also posts here, here, here, here, here, here and, from April 2007, this post.)
I think the “small, secretive committee” explanation is weak, so I’ve been poking back a little in the comments. Chris, as is his style, has been elevating my comments into new posts in order to re-assert his views.
But a more fundamental question is whether or not it can be said that the prediction markets got it wrong. At Sabernomics, J.C. Bradbury reports watching Intrade closely the morning of the IOC decision:
Around 9 AM … the odds show Chicago to be the favorite with a 53% chance of winning, closely followed by Rio at 46%, Tokyo at 3%, and Madrid at 2%. Like all the pundits following the selection were saying, it was a race between Chicago and Rio, but was very close to call. These odds also show something else, Chicago was trending down and Rio was trending up. The trend would continue for the next few hours.
… Looks like useful information was leaking out from knowledgeable parties just before the vote. This is evidence for, not against, the strong-form of efficient markets hypothesis.
Bradbury does an excellent job sifting through the shifting coalitions revealed in the three rounds of IOC voting. Neither Madrid nor Toyko showed any significant ability to attract votes as the rounds proceeded. It was going to be Rio or Chicago all along, but Chicago was weakest in the four-way vote and lost early, leaving the games to go to Brazil.
Based on Bradbury’s analyis, I’m convinced that the decision was pretty much a toss up between Chicago and Rio. That conclusion was also implied in the prediction market prices just before the decision. Sure, the prediction markets favored Chicago, slightly, over Rio; I don’t think you can call it a miss given the closeness of the decision.
UPDATE: Chris Masse doesn’t like my analysis: Who has the best analysis for Chicago’s failed bid for the Olympics?; neither does Paul Hewitt: “Michael Giberson is wrong to imply that the prediction was accurate on the basis that Chicago and Rio were fairly close.” See also here.