Category Archives: Prediction Markets

Coherent Futures

There is very little careful thinking about the far future.  Yes, many people talk about the far future as if they cared, but typical interest rates suggest few care much, and most far future discussion seems to be symbolic talk about current issues.  Furthermore, when people do actually directly discuss the far future, they tend to engage in an extreme far-think, vs. a more practical near-think:

[NEAR] All of these bring each other more to mind: here, now, me, us; trend-deviating likely real local events; concrete, context-dependent, unstructured, detailed, goal-irrelevant incidental features; feasible safe acts; secondary local concerns; socially close folks with unstable traits.
[FAR] Conversely, all these bring each other more to mind: there, then, them; trend-following unlikely hypothetical global events; abstract, schematic, context-freer, core, coarse, goal-related features; desirable risk-taking acts, central global symbolic concerns, confident predictions, polarized evaluations, socially distant people with stable traits.

While our future vision should fade into an increasingly vast and uncertain fog of possibilities, far future fans instead fragment into factions, each confident in a very different view of the important future issues.  Factions use such different assumptions that they rarely build on each others’ work, or even engage others in debate.  Only they really “get it” you see, and few others ever seriously consider their arguments.  Extreme far-thinking apparently produces extreme disagreement.

Such fragmentation may be acceptable when searching a large space for rare combinations, but it is severely dysfunctional for advising common actions.  We instead need to find ways for the few people who actually care about the far future to work together via a division of labor.  But how can we do that?  Just tell each faction to reconsider that they might be mistaken?

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Presuming Bets are Bad

Justin Wolfers:

In recent months, there have been millions of dollars bet in options markets, as traders seek a big payday in the event that the economy heads south – and this hasn't raised an eyebrow. But when an Aussie bookie began offering bets on whether the Australian economy is headed for recession, he stirred up a bit of strife.  Federal Treasurer Wayne Swan called the bookie's actions "utterly irresponsible." The contrast between the Treasurer's response to financial trades and bookies' bets provides a nice example of how people respond differently, depending on how a bet is framed.
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‘Futarchy’ is NYT Buzzword of ’08

From the 38 New York Times "Buzzwords of 2008":

Futarchy

Pronounced FEW-tark-ee. A theoretical government controlled in part by speculative markets. Coined by Robin D. Hanson of George Mason University.

Now if only I could just get some group somewhere to actually try it

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Who Cheers The Referee?

Almost no one, that's who.  Oh folks may cheer a ruling favoring their side, but that is hardly the same.  On average referees mostly get complaints from all sides.   Who asks for their autograph, or wants to grow up to be one?

Similarly who cheers the officials who keep elections fair, or the teachers who grade fairly?  Inspiring stories are told of folks who win legal cases or music competitions, but what stories are told of fair neutral judges who make sure the right people win?  After all, competition stories are not nearly as inspiring with arbitrary or corrupt judges.  Oh judges are sometimes celebrated, but for supporting the "good" side, not for making a fair neutral evaluation.

Sure we give lip service to fairness, and we may sincerely believe that we care about it, but that mostly expresses itself as sincere outrage when our side is treated unfairly.  We usually can't be bothered to pay much attention to help settle disputes in which we have little stake.  So if you want to be celebrated and gain social support, take sides.  But if you want to instead do the most good for the world, consider pulling the rope sideways instead of joining the tug-o-war.  Consider being a neutral arbitrator, or better yet consider developing better systems of arbitration and evaluation.

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Election Gambling History

While it is sometimes claimed that political betting markets are a recent invention, they clearly are not.  Rather it is the absence of such markets during the mid- and late-20th century which is the exception.

Rhode and Strumpf illustrate their point:

Quotes of betting odds on papal succession appear as early as 1503 when such wagering was already considered "an old practice." … Aversion to such activities eventually led Pope Gregory XIV, in March 1591 to ban on pain of excommunication all betting on the outcome of papal elections, the length of the papal reign, or the creation of cardinals. …

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Grateful For Bad News

Speculators were blamed for rising oil prices a few months back, but not for recent falling oil prices.  Short-selling speculators were recently blamed for falling stock prices, and actually banned for a few weeks, but no one proposed banning buying speculators two years ago when stocks were rising.  Now Steven Pearlstein of the Post wants to close financial markets for a week:

What we need to do is to stop making things worse by continuing to over-rely on financial markets and financial institutions that have proven to be incapable of performing their core missions: getting capital to where it needs to go and pricing that capital in a way that reflects the risks and underlying economic values. We have to stop digging. Another week like this one, and there won’t be much left to rescue. 

To begin, the markets could use a timeout just about now, something that lasts longer than a weekend and gives policymakers around the world the chance to get a good nice sleep and evaluate their options without feeling like they have to respond to every movement flashing across their Bloomberg screens.  It would allow some time for passions to cool and for real investors to regain control of markets now dominated by the computerized short-term trading strategies of hedge funds and hot-shot money managers desperate to recoup some of their losses.

I can’t imagine Pearlstein suggesting closing newspapers for a week, or banning them from printing bad finance news for a few weeks.  So Pearlstein doesn’t get it:  financial markets are news institutions, just like newspapers!  The fact that newspapers report a lot less news on this crisis on weekends shows that most crisis news now comes via financial markets.  Don’t blame the messenger for telling you bad news; blame those who caused the bad news, and who keep you from learning sooner.

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Intrade and the Dow Drop

With today’s snapback, the Dow lost 777 and regained 485.

As of this evening, Intrade says the probability of a bailout bill passing by Oct 31st is 85%.

(777-485)/(1-.85) = 1,946.  So a bailout bill makes an expected difference of 2000 points on the Dow.

Of course this is a bogus calculation, but it’s an interesting one.  Not overwhelmingly on-topic for OB, but it involves prediction markets and I didn’t see anyone else pointing it out.  I hope the bailout fails decisively, so this calculation can be tested.

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White Swans Painted Black

Nassim Taleb has an article related to the current financial crisis. While much of what he says is true, he misleads when he implies that the recent collapse of financial companies resulted from a Black Swan. He claims:

use of probabilistic methods for the estimation of risks did just blow up the banking system

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Cowen Disses Futarchy

From a recent Telegraph article:

Professor Tyler Cowen, also of George Mason University, thinks that the problem of bad governance is far too complex to be solved simply by making predictions of how policy decisions may or may not turn out. "I don’t agree with the futarchy idea," he says. "The record of prediction markets is a strong one, but I wouldn’t want to use them to run an entire government.

Imagine a similar statement on voting:

The problem of bad governance is far too complex to be solved simply by having citizens elect representatives.  The record of representatives is strong, but I wouldn’t want to use them to run an entire government.

Or imagine similar statements about propositions, laws, judges, administrative agencies, public hearings, free press, constitutions, etc.  See the problem?  Every institutional mechanism is going go be far simpler than the complex problems to be solved – can that really be a reason to reject them all?

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Intrade’s Conditional Prediction Markets

We have often discussed the possible benefits of prediction markets for reducing bias. One key element that could be particularly useful is a conditional prediction market, where betting claims are based on outcomes conditional on some factor we want to evaluate. Robin recently mentioned the possible benefit from market claims on longevity or health conditional on various interventions.

Unfortunately, there are few prediction markets in the world, and fewer conditional ones, so it is hard to know how practical this institution may become. Thanks to an initiative by OB contributor Peter McCluskey, Intrade – the large, real-money prediction market – has added conditional claims based on the outcome of the U.S. Presidential elections. These may represent the first major case study of real-money conditional futures markets. So how are they doing? Here is some data and analysis.

Because of how the conditional claims are computed, we need to normalize the results by dividing the claim prices by the probability of a win for that party’s candidate. At the moment I looked (2008-07-28, 5:00 PM PDT), clicking on Politics and “2008 US Election”, and expanding “2008 Presidential Election Winner (Political Party)” I saw that the odds for a Democratic victory are 66.7-67.4. The claims are based on Democratic vs non-Democratic victories, so we will use the complementary odds of 32.6-33.3 for a non-Democratic win.

Then clicking on the left on “US Pres. Decisions” gives us the six conditional markets funded by Peter McCluskey.

Here are the claims, the prices, and the normalized values found by dividing by the corresponding Democratic and non-Democratic victory probabilities above. To compute the normalized values, I divided the lowest claim price by the highest party-victory price, and the highest claim price by the lowest party-victory price, giving the maximum range consistent with current trading prices. (Peter provides continually-updated information on current implied values as well.)

Claim Dem price non-Dem price Dem norm non-Dem norm
Increase in US government debt (over $10 billion) 51.2-53.7 34.4-36.5 76.0-80.5 105.5-109.6
Number of US troops in Iraq on 30 June 2010 (over 2000) 41.3-43.8 32.1-34.3 61.3-65.7 96.4-105.2

These prices imply that the market expects that under a non-Democratic administration, we will see substantially higher government debt, as well as much higher numbers of soldiers in Iraq.

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