Followup: Is John Kerry a dangerous pick?

Back in July, I analyzed the prices of several contracts on the Foresight Exchange fake money idea futures market, to determine the expected odds of a nuclear attack on a U.S. city by 2010, based on who becomes president. I concluded based on the prices at the time that the market seemed to suggest that "the U.S. is over three times as likely to be nuked by 2010 if Kerry is elected than if Bush is reelected".

The contracts I looked at were:

• Bush04 — Bush is reelected.
  
• NukeUS — The U.S. is nuked.
  
• GBNuke — Bush is reelected and the U.S. is not nuked.

Utilizing simple algebra, one can extrapolate from the market prices of those three contracts what the expected odds of the U.S. getting nuked are, given a Kerry presidency vs. a Bush presidency.

However, there are many possible market distortions which could have been in play, many of which I mention in the original post. One that I didn't mention was the fact that there was no analgous "JKNuke" contract based on the odds that John Kerry will be elected and the U.S. will not be nuked. As such, a slightly different process was required to extrapolate the Bush nuke odds than to extrapolate the Kerry nuke odds.

Since then, I have introduced just such a contract, so that there is symmetry between the mechanism by which the odds are extrapolated for both candidates. In addition, the volume has increased on all of the relevant contracts, so the data may be somewhat more meaningful than it was in July.

The market prices as I write this are as follows:

	Bid	Ask	Last
Bush04	50%	57%	58%
NukeUS	20%	22%	20%
GBNuke	40%	48%	41%
JKNuke	40%	45%	40%

Now, let's figure out the odds of the U.S. being nuked by 2010 and Bush being reelected (let's call this BushCrap). We know that the odds of Bush being reelected and the U.S. being nuked plus the odds of Bush being reelected and the U.S. not being nuked must add up to the simple odds of Bush being reelected:

GBNuke + BushCrap = Bush04

We can rearrange this as:

BushCrap = Bush04 - GBNuke

If we're generous to Bush, we'll plug in the bid price for Bush04, and the ask price for GBNuke, since that gives you the lowest possible price for BushCrap:

BushCrap = 50 - 48 = 2

In other words, in 2 out of 50 instances of Bush being reelected, the U.S. gets nuked. So that puts the lower bound at 4.0% odds if we choose to reelect him.

Now what if we're not very generous? We'll use the ask price for Bush04 and the bid price for GBNuke:

BushCrap = 57 - 40 = 17

So that gives us 17 out of 57, or 29.8%. In other words: the odds are somewhere between 4.0% and 29.8% of the U.S. getting nuked by 2010, should we reelect Bush.

What about Kerry (100 - Bush04)? Via the same process:

KerryCrap = (100 - Bush04) - JKNuke

If we're generous:

KerryCrap = (100 - 57) - 45 = -2

If we're ungenerous:

KerryCrap = (100 - 50) - 40 = 10

Obviously the odds can't be below zero, so let's put the lower bounds at 0.0%. The upper bounds are 10 out of 50, or 20.0%. Therefore: the odds are somewhere between 0.0% and 20.0% of the U.S. getting nuked by 2010, should we elect John Kerry.

There's a bit more fine-tuning we can do, however. We know that KerryCrap plus BushCrap must add up to equal NukeUS, right? After all, they together encompass both possible ways we could get nuked by 2010. Since:

BushCrap <= 17

and

NukeUS >= 20

we have:

KerryCrap >= 3

Thus, the lower bounds for being nuked if Kerry is elected are actually 3 out of 43 (43 because BushCrap is 17 only if Bush04 is 57), or 7.0%.

With the same logic, since:

KerryCrap <= 10

and

NukeUS >= 20

we have:

BushCrap >= 10

Thus, the lower bounds for being nuked if Bush is reelected are actually 10 out of 50, or 20.0%.

This puts the numbers for Bush at somewhere between 20.0% and 29.8%, and the numbers for Kerry at somewhere between 7.0% and 20.0%. That clearly favors Kerry. I attribute the July numbers to the lack of volume and the lack of an analogous JKNuke contract which now exists.

However, the caveats as mentioned in my first post still apply. One additional substantial caveat I did not mention then is that, since the Foresight Exchange does not use real money, it works more like a subjective poll of those who choose to take it, rather than taking advantage of the "smart money" that already exists in the real world.

As everyone knows, I disagree with this. I think Bush's policies are better for America's security, and I intend to vote on that belief (I also hold 225 shares of GBNuke and -450 shares of JKNuke). But I thought it was important to update my readers on the new data now that it exists.

UPDATE 9:44 PM: Just ran the numbers again, barely an hour after the initial post. Bush is between 21.6% and 23.1%. Kerry is between 16.7% and 18.4%. This still favors Kerry, however it is much closer now. So this confirms my earlier statement that you have to take these numbers with a grain of salt. They're very volatile and can be easily moved by a single trader.