Monthly Archives: May 2007

Is there manipulation in the Hillary Clinton prediction market?

Both Eric Zitzewitz and I have recently noticed some suspicious activity in the InTrade market for whether Hillary Clinton will be elected President, with someone bidding up her odds from about 25 to around 40 (currently hovering at 38).  This just strikes as us too high, relative to her chances of even garnering the nomination (around 51).  And when we saw this mis-pricing, we suggested that manipulation may be at play (see Eric here; my comments here; Robin Hanson here; and Greg Mankiw here).

But Koleman Strumpf isn’t so sure that this is manipulation. Koleman’s main evidence is that the law of one price appears to (roughly) hold across markets, and so the 2008.PRES.CLINTON security is similarly priced on BetFair, and elsewhere.  Of course, this isn’t evidence against manipulation, but it is interesting.  He raised the real possibility that this is a rational market response to some recent developments, although for the life of me, I can’t figure out what development that may be.

At the heart of Koleman’s concern is a question about the burden of proof here. And I have some sympathy for the view that when a market price moves in a direction you don’t expect, one should change one’s expectations, not one’s view of prediction markets.

So here is a simple way to resolve the issue of the burden of proof…  If the current market price is a reflection of available information, then as future information comes in, the market price is as likely to rise as to fall.  So I want to offer Koleman the following bet: If the price of 2008.PRES.CLINTON is higher than 38.3 (the last traded price on Intrade) on June 30, 2007, then I’ll buy him his favorite cigars. And if it is lower, I’ll be waiting for a good bottle of Aussie red.

Of course, we would want to make sure that this friendly wager is, itself, manipulation-proof.  So I’ll suggest we use the volume-weighted average trading price on June 30 to resolve the bet, and not simply the last 11:59pm trade.

So Koleman, do we have a bet? 

And more generally, do we have a useful mechanism for resolving scientific disputes?

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Shock Response Futures

This month’s Quarterly Journal of Economics features an article by Snowberg, Wolfers, and Zitzewitz: 

Analyzing high frequency financial fluctuations on November 2 and 3 in 2004, we find that markets anticipated higher equity prices, interest rates and oil prices and a stronger dollar under a Bush presidency than under Kerry. … analyses of all Presidential elections since 1880 … [suggests] electing a Republican President raises equity valuations by 2-3 percent, and that since Reagan, Republican Presidents have tended to raise bond yields.

Their method can show how speculators expect a Republican president to effect any outcome X, but it suffers from three key limitations:

  1. the election, and the relevant outcome X, must both be forecast by markets whose prices change many times on election day,
  2. you must believe other important influences on X have been controlled in the statistical regression analysis, and
  3. it is not available in time to usefully advise voters on how to vote in that election.

Continue reading "Shock Response Futures" »

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Free Money, Going Fast

At Marginal Revolution, Justin Wolfers suggests, and at Midas Oracle, Eric Zitzewitz suggests, that someone has been manipulating the Intrade markets to make Hillary look good – Intrade now gives Hillary a 77% chance of winning if she is nominated.   If that seems too high, trade accordingly.

Added: Koleman Strumpf says it is 65% now, other markets have similar estimates, and maybe it represents real info.

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Arrogance as Virtue

Ko and Huanga, in the May Journal of Financial Economics:

In behavioral finance, overconfidence has been established as a prevalent psychological bias, which can make markets less efficient by creating mispricing in the form of excess volatility and return predictability. In this paper, we develop a model in which overconfidence causes investors to overinvest in information acquisition when this information could improve market efficiency by driving prices closer to true values. … Overconfidence generally improves market pricing provided the level of overconfidence is not too high.

In principle, prediction markets would require subsidies to get people to take risks trading on topics where they do not need to hedge risks.   In practice, people are often willing to trade in zero-sum situations.  This improves price accuracy overall, but also suggests that people who run markets where folks can now legally speculate will oppose legalizing new markets, for fear of diverting their arrogant traders. 

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Are any Human Cognitive Biases Genetically Universal?

Genetically universal human traits are such things as the eye, appendix, having two legs and two arms and a head, etc. There are no exceptions to universal traits (embryological accidents don’t count).

Of 67 Cognitive Biases, 62 are not claimed  to be universal, based on published evidence for them that  ‘many’ or ‘most’ subjects show a ‘tendency’ ‘toward’ them ‘often’ to a ‘statistically significant’ degree, etc.

Of the 5 exceptions, the Anthropic Bias and the Adaptive Bias are defined as universal, so empirical evidence for universality is superfluous.  The Contrast Effect is perceptual (e.g., a hefted weight is perceived as heavier when contrasted with a lighter weight, lighter when contrasted with a heavier weight) and ‘ubiquity ‘ is claimed. The other two are memory limitations — in the Primacy and Recency Effects, items at the beginning and end of a long list are remembered better.

However, the other biases could still be genetically ‘universal’  if present in all persons without special training (as children or uneducated adults) or in all persons in genetically isolated communities.

Failing evidence of universality, a cognitive bias could  be shown to be  genetic if it runs in families (one-egg twins more similar in a particular bias than two-egg twins, etc.).

Is there any other evidence for universality of Cognitive Biases?

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Hofstadter’s Law

I read Douglas Hofstadter’s new book I am a Strange Loop, which argues that consciousness happens spontaneously after a system of dynamic patterns is sufficiently complex.  Strange loops of self-awareness  existing on multiple levels (as in Godel’s famous proof) create hallucinations of a hallucination, and so an "I" forms.  Anyway, as I often do when reading nonfiction, I read a little bit more about the author, and was struck by Hofstadter’s law: It always takes longer than you expect, even when you take into account Hofstadter’s law (note this is recursive and paradoxical, which is Hofstader’s specialty). This turns out to be pretty well known among programmers where everyone has read Hofstadter’s Godel, Escher, Bach.

As they say, Hofstadter’s Law is funny because it rings true to many programmers, who often work on complex projects that take years to complete.  Clearly an alternative to the Law of Iterated expectations.  Why might people involved in sufficiently complicated tasks–writing a paper, a book, building a deck–generally underestimate their length?  I think the main reason is that goals become self-fulfilling, so any lengthening of a goal time would add to the total time  the way bureaucracies spend the limit of their budget whatever it is.  Just like a group of people, people themselves have multiple goals; to watch tv, to get a project done, to be a better golfer.  A successful goal needs a  bias to compete with your other goals, who probably also have biased homunculus advocating for them in your mind. 

On one level an unbiased expectation is optimal because it allows us to allocate our resources more efficiently.  But there are many cases where this is not true, where a little too much hope and faith actually makes you a more successful person, and more fun to be around.  Just think about how annoying ‘brutally frank’ people are–they are jerks.  Think about the guy who thinks he is a better dancer than he really his confidence actually makes him a better dancer, because part of good dancing is not being self-conscious.  Robert Trivers has pointed out that self-deception is, in moderation, an evolutionary advantage, in that a liar who believes his own lies is a more effective persuader than a lie who knows he is lying, and fundamentally we are social animals trying to convince others to do this or think that.

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The Agency Problem

Good teachers learn early on to tell stories wherever possible — it’s a lot easier to remember "that time Professor Jones got $300 off on a plane ticket" than "certain goods have high elasticity of demand in the short run." We’re hard-wired to think in terms of other conscious actors ("When Bill walked too close to the firepit…"), so it makes sense that anecdotes stick.

The problem is that in the process of anthropomorphizing, or anecdotalizing, or allegorizing, we can impute agency where it isn’t due. When we teach kids that "electrons follow the path of least resistance" or "genes want to survive," when we insist that there’s a Mother Nature or Father Christmas, we occlude understanding.

For instance, a friend of mine recently argued that future generations of humans will have no pinky toe because we have stopped using ours. Her faulty assumption was that Nature actually "selects" against what She perceives as unnecessary features, or even, that our bodies are trying to improve. She missed the fact that evolution, like every other blind, unconscious, and tasteless mechanism of the natural world, just is; whichever genes survive, survive. That’s what’s so impressive and important.

Continue reading "The Agency Problem" »

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My Podcast with Russ Roberts

Russ Roberts has an interesting series of podcast interviews of economists, most of who are much more distinguished than I.  Today Russ Roberts posts his interview with me, mostly on medicine, but also on a few other topics. 

The point I make more clearly there than I have before is the importance of not trying to immediately offer ad hoc explanations for every puzzling observation you see.  Instead, collect many puzzles, spread them out on the table before you, and look for a few simple assumptions than can explain many diverse puzzles at once.  This is the key discipline of armchair social science. 

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Truly Worth Honoring

Today is Memorial Day.  In a park near my home is a plaque that reads:     

We honor all those who fought for our community.

There is probably a similar plaque near you.  I would be more proud to live in a community with a plaque that read:    

We honor those who fought against our community when it was wrong. 

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Scientists as Parrots

I just spent the last two days at a Whole Brain Emulation Workshop here at the Oxford Future of Humanity Institute.  Most of the dozen attendees were scientists who scan and model brains.  They were quite professional in their presentations and discussions, attending expertly to many subtle complications, but overall they were mostly excited and optimistic about the prospects for improving our abilities to scan, model, and emulate large brain areas, even entire brains, for many kinds of animals, including eventually humans.

When asked if they would be interested in producing a consensus statement which made more precise their expectations about feasibility and rates of progress, however, these scientists expressed concern about their funding.  Their research is expensive, and they typically frame their work on larger scale brain emulation in other terms, which funding agencies prefer; these agencies would react poorly to hearing that these people did  research framed as "whole brain emulation."

I’ve often seen such a pattern – scientists tell funding agencies, and all other public ears, just what they think the funding bodies want to hear.  I dearly wish we could have prediction markets on such topics, so we could find out whether the powers that be have good reasons for their negativity, reasons which would encourage them to bet, or whether they are expressing shallow unthinking prejudice, which betting markets might unmask.

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