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Nineteenth-century prediction markets:

Those who are interested in Mike Abramowicz's prediction markets posts may also be interested in this new NBER working paper I just saw on SSRN:

Historians have long wondered whether the Southern Confederacy had a realistic chance at winning the American Civil War. We provide some quantitative evidence on this question by introducing a new methodology for estimating the probability of winning a civil war or revolution based on decisions in financial markets. Using a unique dataset of Confederate gold bonds in Amsterdam, we apply this methodology to estimate the probability of a Southern victory from the summer of 1863 until the end of the war.

Our results suggest that European investors gave the Confederacy approximately a 42 percent chance of victory prior to the battle of Gettysburg/Vicksburg. News of the severity of the two rebel defeats led to a sell-off in Confederate bonds. By the end of 1863, the probability of a Southern victory fell to about 15 percent. Confederate victory prospects generally decreased for the remainder of the war.

The analysis also suggests that McClellan's possible election as U.S. President on a peace party platform as well as Confederate military victories in 1864 did little to reverse the market's assessment that the South would probably lose the Civil War.

This paper is also available directly on the NBER site, though I'm not sure whether the general public has free access to it.

Michael Abramowicz (mail):
Sasha, thanks for posting this. Those who like that article might also like Paul Rhode and Koleman Strumpf's paper on historical presidential betting markets (here).
2.1.2008 3:42pm
Anderson (mail):
I can't open the paper -- why did they start with the beginning of the end for the Confederacy? I would be more interested in what the predictions were for the 1st half of the war.
2.1.2008 4:23pm
Sasha Volokh (mail) (www):
Anderson: How about "Our results suggest that European investors gave the Confederacy approximately a 42 percent chance of victory prior to the battle of Gettysburg/Vicksburg."?
2.1.2008 4:25pm
byomtov (mail):
Interesting idea, though it doesn't tell us much about the accuracy of the assessment.

the method could be generalized to a number of European wars, I suspect.

Remember the apocryphal tale of Rothschild getting the news from Waterloo via carrier pigeon and profiting hugely by buying British govt bonds before the outcome of the battle was known to others? (I think in the movie he first ostentatiously sells, inducing panic, then has agents buy. A veritable George Soros)
2.1.2008 4:43pm