This column by David Leonhardt cites the recent Supreme Court ruling as an example showing that prediction markets aren’t so great. After all, Intrade was putting the chances of the individual mandate being found unconstitutional at 75%.

But concluding anything from this about the prediction market being “wrong” is, well, wrong. If *everything* that Intrade said would happen with probability 75% indeed happened, *that* would be a clear sign of a market inefficiency. If only half of such events happened, that would constitute an inefficiency also. But a single event with market probability .75 failing to happen is no more a sign that the market is inefficient or “wrong” than the Yankees losing a game to the Royals, however much more important the event may be.

What should we expect from Intrade? Barring insider trading, we can expect a reasonably efficient aggregation of publicly available information. If there is little public information, we will see probabilities that tend more towards .5 than to the extremes, and they will often be “wrong” if one defines this as being on the wrong side of .5, but non-extreme predictions are supposed to be “wrong” a substantial minority of the time. Of course, if you were able to seduce a Supreme Court clerk, you might have been able to make a better prediction. This doesn’t expose a market flaw any more than the potential profits from insider trading expose a flaw in the conventional stock market.

Roberts’ vote was no more predictable to an outside observer than a baseball pitcher’s unexpectedly good or bad game, however many reasons we may find for it ex post. Unpredictable things happen. This is why the probability was .75 and not 1. Many pundits acted as if striking down the law was near-certain, so I would say the market showed some wisdom in placing the probability at only .75.