Before I explain the metaphor, allow me to present the Health Care Reform Hustle. Let’s go way, way, back to the beginning of 2010, where the long-delayed bill on HCR is about to pass in the House, held together by a rickety Democratic coalition. The Hustle proceeds as follows:
- Spend a few thousand dollars consistently shorting Intrade’s contract on HCR passing successfully.
- Get the story picked up by conservative bloggers, which should be an easy sell because it combines two things they already love (namely HCR failing and markets).
- Get the story picked up by the wider media.
- Use the increased pressure to lobby the weakest members of the Democratic coalition to change their vote (“See? It’s all falling apart!”)
- Watch HCR flounder.
- Make tons of money on your short positions.
Now, of course, this actually happened, and it fell apart somewhere between steps two and three. Here was Gawker’s take on the issue:
I hate to break it to the manipulator, but making the chances of HCR passing seem lower on an Internet trading website does not actually have a real-world effect on the chance that HCR will pass. All you actually did is briefly make a bunch of conservative bloggers feel pangs of joy in their cold, cold hearts.
Back to that metaphor. Cameras take an objective (let’s not get all Errol Morris here) picture of reality. Engines create their own reality. The metaphor, as applied to markets, is shamelessly stolen from An Engine, Not a Camera, which is the best book I’ve read over the past few months.
Now, the shenanigans in the HCR market (and, for that matter, in the 2008 presidential market), seems to imply that the “Golden Age” of prediction markets, in which a small number of interested nerds could make bets in the comfort of their homes without impacting the events themselves, is fast coming to an end. It’s only a matter of time, a couple years I would guess, before the kind of manipulation I’ve described actually works.
Of course, this also hints at a much larger, more dangerous question. If the market manipulation I’ve described failed because the Intrade’s HCR market just wasn’t visible enough, what does that say about the markets we see every day?
