Paul Krugman has an rather interesting insight into the New Hampshire primary results, specifically he gives us this picture of the Intrade price for “Clinton wins the Democratic nomination” bidding:

These investors in this market, you know the one that is supposed to predict the future, got it completely wrong. In fact, as time went on more and more of them got it wring (the bar graphs are at the bottom). Dr. Krugman notes, “There’s no hint that the market saw either Iowa or New Hampshire coming, or knew anything beyond the bloviations of the talking heads.”

That is the little picture, but there is a bigger picture, and that is that markets are not some sort of magically predictive tool. They are simply a sort of group guessing game.

One of the arguments for the increasing use of arbitrage is that by creating derivatives, like futures market, help the economy, because of their ability to predict future market swings.

The answer is that they don’t. What more, as can be seen on an almost weekly basis, these instruments contribute to price swings, and make commodities more active, by adding another layer of profit taking on the way to market, though, to be fair, they employ no-account Harvard MBAs.

There are cases where futures markets are essential. Without the ability to buy rubber for delivery at a later date, for example, bidding on OEM tires for a car manufacturer would be risky and more expensive, but now we have entities like stock futures, which are unnecessary, make the market more volatile, and encourage speculation at the expense of investing.