Over at the Chicago Faculty Blog, Cass Sunstein has an interesting post on prediction markets. Commenting on the broad coverage of the fact that prediction markets didn't predict that Hillary would win the New Hampshire primary, Cass notes the possibility that skepticism about prediction markets may result from the availability heuristic. That is, when a prediction market predicts a low probability of something and that event occurs, observers may see that as the prediction market not "working" rather than it being an instance in which a low probability event did indeed occur. He concludes:

To be sure, we are continuing to obtain information about how prediction markets perform and when they do well and poorly. Perhaps they will turn out to be less reliable than they seem -- and in all likelihood, we will obtain a better understanding of when they work. And of course no one has a crystal ball. But . . . if you want to have a sense of the probabilities, you'd probably do best to consult Intrade.

  Perhaps that's right. At the same time, I would think prediction markets will tend to beat the common wisdom only when there are people actively participating in the market who have better knowledge than a reasonably informed member of the public. And for the most part that usually won't be the case when the future event is a subject of intense media speculation like an election.

  The problem with prediction markets in elections is that the media and the public are already obsessed with predicting the outcome of elections. Everyone loves the horse race. Those who have particularly deep insights into who will win elections -- assuming those people exist -- already are eager to share them with the world, and the media is eager to broadcast their views.

  If the market for experts is competitive, the experts who are the best predictors will end up having the most impact on the common wisdom about the election. In that setting, there's no particular reason to think prediction markets will beat the common wisdom instead of just reflecting it.