I was reminded today by the Freakonomics Blog on the New York Times that we botched the American Idol Prediction. While our chart shows eventually we had David Cook as the winner, it was primarily because of a few last second trades that went in before we could pause the market.
So, what went wrong? As someone that can see the trades that occurred and the activity on the contracts, the biggest thing that jumps out is the lack of volume and activity. In order for a market to trade efficiently they need to be liquid and there needs to be an adequate amount of traders in that market.
Regardless, I think there is still important information that can be learned from this market. While David Archuletta was in the lead for nearly the entire series, David Cook started making steady gains against him around the 5th of May.
Additionally it's important to remember prediction markets aren't guaranteeing someone will win if they have the highest price, merely stating a probability. The day before the final show David Archuletta had dropped down to 80% which means there was still a 20% chance he would lose.
Combine that with the fact that Archuletta's lead was continuously decreasing the last couple weeks and I think you can make an argument that there is still value in the information the market provides.
Parts of this post appeared in the comments section of the Freakonomics Blog