Tuesday, February 11, 2014

DotCom bets: they just got more complicated.

iPredict has a contract that pays $0.10 for every 1% of the vote earned by the yet-to-be-formed Kim DotCom Internet Party. The contract's price then is the market's expectation of the party's vote share.

But not anymore.
We now have a ridiculously complicated contract. Here's what you're trading on, if you're buying this contract.

So, what the hell should you pay for a contract that pays $0.10 for every 1% of the vote earned by the yet-to-be-formed Kim DotCom Internet Party?

Let's label a few terms and make a few guesses. 
  • Pp is the probability that there is a Party, say 0.8.
  • Ps is the probability that DotCom really would kill the party if it doesn't poll 5% prior to the election, say 0.75
  • Vh is the expected vote share conditional on a poll result of 5% prior to the deadline
    • This one's hard to ballpark. You could make an argument for pegging it lower than 5% because a single outlier poll could be sufficient for his going ahead. But I expect that the state of the world in which he can get a single >5% figure is the state of the world in which we've had substantial GCSB revelations affecting NZ; in that state of the world, I'd put even odds on 5%. And so I'll stick it at 5, or $0.50 in iPredict prices.
  • Vl is the expected vote share conditional on no polling result of 5% prior to the deadline.
    • I'll peg this at 0.5%. If he goes ahead despite no polling result above 5%, credibility's shot. And it's also the state of the world in which there's no substantial GCSB revelations. So $0.05 in iPredict prices.
  • Pt is the probability that the Internet Party polls at least 5% prior to the deadline.
    • I'll peg this at at even odds IF we get substantial GCSB revelations during the election campaign, and nil otherwise. Supposing even odds on substantial revelations, that gives us 25%.
The expected value of the contract is then:

Pp*[[Ps*[(Pt*Vh)+((1-Pt)*0)]+[(1-Ps)*[(Pt*Vh)+((1-Pt)*Vl)]]]

Using my rough ballpark estimates, that's then:

0.8*[[0.75*((0.25*$0.5)+0)]+[0.25*[0.25*$0.5+0.75*$0.05]]]
= 0.8*($0.09375+.25*$0.04375)
= 0.8*$0.1375
= $0.11

7 comments:

  1. Would you not be better advised to hedge your prior (foolish) bets against me and Heffernan?

    ReplyDelete
  2. Stakes with you and Heffernan aren't high enough to warrant it.

    ReplyDelete
  3. Amusing that all of this comes from a Twitter conversation that started with the observation that making predictions about the Internet Party is probably a fool's errand. (I note that my prediction - farce - seems to be holding up pretty well.)

    ReplyDelete
  4. My reasoning: gcsb revelations increase attention for the party, increasing chance of farce over and above (very high) baseline. Such farce in turn punished by voters.

    ReplyDelete
  5. At the margins they're at, doubt it'd have much effect.

    ReplyDelete
  6. looking to lose the terrible Vodafone Telstra down line,who cheat youat the level of your house phone, very expansive, as well as very expensive:
    and well I thinking Mr DotCom Orcon
    Check it out for youself dudes Gewtrman prices.

    ReplyDelete

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