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The Place for Play Money/Fake Money Markets

We've been having some debates about prediction markets around here.

Prediction markets come in two flavors: pretend money and real money. Pretend places are like Hollywood Stock Exchange and EdmundsInsideLine where fanatics, in these cases movie fans and car buffs, can bet on happenings in their respective areas of obsession.

Real money places, notably Intrade and Iowa Markets, are essentially betting sites. They allow trades on various political and cultural events with real money.

Points of debate:

Are these markets useful for predicting actual outcomes?

Most of the research says "yes." I tend to think the markets with real money are probably better. That's based on my own money-where-the-mouth-is intuition. My debating colleagues, notably Ariel Nelson over at the CNBC By The Numbers blog, point me at research, which argues that pretend money and real money markets have the same level of accuracy.

I dunno. Still goes against my gut. The research does make a good point, though, that a $100 bet to a Joe Average may mean a lot more than a $100 bet by a Donald Trump, and so real money markets can be skewed by rich idiots (not that The Donald is an idiot).

Do a lot of people use these sites?

From what I can tell, not really. The above mentioned research used football games with about 100 traders betting. That doesn't seem like a lot to me. And low numbers makes for less accuracy. Maybe that's why they are right only about two-thirds of the time.

Should we report what these sites say?

I've had this debate at places besides CNBC, fyi. I think it is useful to readers ... a kind of quick and dirty way of gauging the outlook. Just like when sportscasters cite the betting line and over/under on football games. But the "gambling" nature puts some journalists off.

This discussion gets more complicated when the subject turns to actually housing some of the data. Is it just providing information ... or promoting betting action?

A little disclosure on this: We've dabbled a toe into the situation on our Politics Page, with a Rasmussen Prediction Market module. I'm not so sure we should go farther. What do you think?

Do they have a purpose beyond prediction?

Hey, they entertain. Any you can try out investing strategies and hunches without risk or with very little at stake. If you think you got the surefire method of predicting a market or stock move, you might want to try it out for free or for $100 before betting your life savings.

Shameless Self-Promotion ... You can do that with our Million Dollar Portfolio Challenge too. Of course, the contest is only temporary and the prediction markets are here to stay. You can make a hobby of it, if it is worth your time.