# Arbitrage with the In-laws!

I've just discovered the Predictit.org website, which is a "Prediction Market" where participants can place bets on the occurrence of future events, such as the outcome of political elections. Predictit.org is similar in function to the defunct website Intrade.com (Wikipedia). But, unlike Intrade.com, they seem to have done their homework with U.S. regulatory bodies beforehand. Nevertheless, I am writing this tongue-in-cheek post to illustrate how such a website might be used to engage in casual arbitrage at the expense of your in-laws, or anyone else who might not think much about the "market odds" of a future occurrence. BTW, John and Marianne, if you read this, I would never try to trick you in such a way :).

Suppose I make a wager with my father in-law that a Democrat will win the 2016 presidential election, and that we both put up \$500 with even odds. So, if a Democrat wins, I gain \$500, but if a Republican wins, I lose \$500.

Further suppose that I can take the other side of this bet with more favorable odds somewhere else, say 6-to-1 favoring the Democrat (the odds are closer than this right now, on Predictit.org). That is, if I bet \$150 dollars that a Republican will win against 6:1 odds, then I will gain \$750 if the republican wins and lose \$150 if the democrat wins.

Now, consider the two possible outcomes (assuming that either a Democrat or Republican are sure to win): 1) A Democrat wins, and I gain \$500 dollars on the first bet and lose \$150 on the second for a net \$350 gain. 2) A Republican wins, and I lose \$500 on the first bet and gain \$750 on the second for a net gain of \$250. Thus, I win at least \$250 either way. Of course this would only work if my father in-law agreed to take worse odds (i.e., paid more for the bet) than could be had elsewhere. This is a type of market arbitrage.