Betting markets in everything

by on September 24, 2008 at 9:47 pm in Current Affairs | Permalink

Will Congress approve a bail-out package for banks before September 30?  Right now the contract is selling at about 79, which usually translates roughly into a 79 percent chance of approval. 

Note however that the marginal utility of money here does differ across worldstates.  Assume that the marginal utility of money is higher (people are poorer) with no bail-out.  That makes some people want to bet against the bail-out as a form of insurance, thereby raising the price of the "no bail-out" contract.  (Addendum: that was bad phrasing — no one has to intend insurance as long as the MUs of money differ across the world-states.)  In other words, the real implied chance of a bail-out is higher than 79 percent.

1 Martin September 24, 2008 at 10:17 pm

Assuming x is true is different from x being true. You’re correct, one could take that strategy. But just because it could be used as insurance, doesn’t mean it is.

2 OneEyedMan September 24, 2008 at 10:38 pm

I’d love to see that pricing kernel.

3 Seth Burn September 25, 2008 at 12:28 am

Congress doing the right thing is off the table. Isn’t no bail outs part of the GOP platform? I want my tax dollars (and the dollar itself) to be kept safe. No bail out, let’s take our recession (depression?) like men, and rebuild.

Of course that will never happen. Bernanke is trying to force a bail out by sucking liquidity out of the markets and causing more banks to suffer. I would like to see Bernanke and Paulson removed from their posts. Of course, that won’t happen either.

What will happen is that the American taxpayer will transfer what little remians of their wealth to the people who bet on the credit default swaps.

Sucks to be a citizen these days.

4 glenn September 25, 2008 at 3:41 am

Seeing as how it seems only within the past few days, Congress et. al. have finally
understood it is indeed one hell of a slow-motion train wreck, they will get off their
collective brains and pass a (perhaps not the) bill. So, yes.

5 J Thomas September 25, 2008 at 6:29 am

Anybody who can insure against his exposure to the crisis by betting on Intrade will not have any inside info.

Unless he’s a janitor in the Treasury etc.

6 Robert Bell September 25, 2008 at 8:57 am

I love the smell of Arrow-Debreu securities in the morning.

7 pnj September 25, 2008 at 9:38 am

not really true, the amount you can bet on intrade is too small to hedge anything that matters

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