DotCom bets: they just got more complicated.

By Eric Crampton 12/02/2014


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