Prediction Markets -Another View (via The Big Picture)

As I've written previously, I'm a big fan of prediction markets (both as a classroom tool and as a means of extracting information from dispersed groups). However, Barry Ritholtz at The Big Bicture has a less favorable view:

...In the past, I have very strongly dissed some people’s concept of these markets and their ability to “predict” the future. The primary reason for my view is the unfortunate tendency for some people to place way to much faith in the crowd to know the unknowable.

I have yet to see a reasonable explanation as to why IEM missed Dean's collapse in the primaries; a commentor notes that the American Idol contract on Tradesports had Bice 90% favored in the final minutes -- but lost.

click here for the whole article.

He makes some valid points. One of the shortcomings of most prediction markets (like Tradesports or the Iowa Electronic Markets) is that they're not very liquid. A relatively small trade can move prices significantly. Having said that, I'll still use them in class. After all, where else can you talk about the Michael Jackson Trial in a finance class?