In a column, Andrew Gelman and Eric Loken note that academia has a problem: Unfortunately, statistics—and the scientific process more generally—often seems to be used more as a way of laundering uncertainty, processing data until researchers and consumers of research can feel safe acting as if various scientific hypotheses are unquestionably true.
Reading this in the newsfeed reader was impossible, since the quotes are done with p tags (whose padded-left style gets stripped) instead of the more reasonable blockquote tags.
I'd bet this will be fixed in the mid to long term.
Stephen, stocks which can't be bet against (unshortable and no puts available) often become astronomically overvalued and badly misunderstood.
"But your point is valuable in foreseeing the cultural consequences of prediction markets. These would include not just information hoarding but increased promotion activity as opposed to disinterested discussion."
The talk surrounding unshortable stocks is anything but enlightened, disinterested, discussion. It is the most gullible, naive BS out there. Because when bad info is silenced, overoptimism results, which filters out non-loons. The absence of Shorts doesn't shut up the Longs; it emboldens them to spew nonsense. See Afro Studies for an analog.
Not necessarily more information sharing on balance, even after he shorts: withheld is adverse information. (Also, general understandings that help you predict in the future may be withheld, unless its value of inducing conviction in the present case is great.)
But your point is valuable in foreseeing the cultural consequences of prediction markets. These would include not just information hoarding but increased promotion activity as opposed to disinterested discussion.
And (relatively) disinterested discussion is a fragile public good.
[Added.]There is one important difference (in degree) between the typical investment market and prediction markets: the period during which a position is established (if I'm using the term correctly) is apt to be much longer in many prediction markets, as it may include many years during which the speculator in predictions develops the understanding on which the prediction is based.
What if everyone else has been keeping the number of die rolls they've seen, and their outcomes, secret? <irony> I thought all you needed was the market price!</irony>
Stephen, you're wrong. Once an investor shorts a stock, he publicizes his thesis relentlessly. Sure, while he's accumulating his short position he keeps his thesis quiet. But once short, he promotes to speed up the price adjustment process.
"In an efficient market, with no information asymmmetry and other ideal assumptions, you expect nobody to have a non-zero average return."
Actually you do because there are always unforeseen events (such as natural disasters or changes in fashion) that even a perfectly efficient market cannot predict, but even if that were not true you'd still expect some players to get lucky over finite sequences of transactions and it just so happens that human lifespans are finite.
"If you buy a stock, it will usually pay you dividends, but it the stock was correctly priced, as the efficiency assumption entails, then all these dividends, appropriately discounted, were already accounted for in the price you paid."
And you'd still make an 8% annual gross profit.
Whether or not insiders or experts can beat the market depends on what it is that market is selling.
Really, they "foresaw" the problems before the problems came about? Did they act before the collapse of Lehman brothers?
FYI, I'm just saying there's a difference between markets where most people have a stake in the underlying goods or services and markets that are purely speculative. I actually believe in the case of the housing crisis the detachment would have served a prediction market well: a prediction market in 2005 based around the sustainability over say 5 years of the housing market would probably have leaned towards predicting trouble within those 5 years, whereas the actual housing market suffers from self-fulfilling prophecies and people trying to cash in right before the next bubble bursts. But there are also cases where detachment is not a good thing. I guess shortselling mortgages on a 5 year term is already a bit like a prediction market, it would be interesting to look at such markets (which you've probably done in much greater detail than I have). Oh, and you should really try to get prediction markets going in the UK (and/or Macau) if you want to empirically test them.
Pointless quibble: Depending on how the original probabilities were arrived at, like "We previously saw five 4s and none of any other number, so we figured it wasn't a fair die", you might want to bet quite a lot differently from the previous distribution after seeing a single 6. Less pointlessly: Ronfar, if you have some math background, check out the Dirichlet prior and the Good-Turing estimator for some general principles on adjusting probabilities on this kind of sampling problem.
I have a question about prediction markets and information sharing.
Let's say that there's a 6-sided die with a bias in favor of one of the sides. The bias is currently unknown, but there's a prediction market on what the die will roll on a specific future occasion. Other people have gotten a chance to roll the die, and the current market estimate of the probabilities of rolling each number is:
1: 5%2: 5%3: 5%4: 75%5: 5%6: 5%
I get a chance to roll the die once, and it comes up 6. This is new, relevant information that only I have. How should I bet so as to communicate this information?
I invite the reader to try and identify a single instance in which a “deep structural parameter” has been estimated in a way that has affected the profession’s beliefs about the nature of preferences or production technologies or to identify a meaningful hypothesis about economic behavior that has fallen into disrepute because of a formal statistical test.The Scientific Illusion in Empirical Macroeconomics, Lawrence H. SummersThe Scandinavian Journal of Economics, Vol. 93, No. 2, Proceedings of a Conference on NewApproaches to Empirical Macroeconomics. (Jun., 1991), pp. 129-148
Folks have incentives to reveal the info that is directly rewarded, but not the info that is not directly rewarded.
The relevant point is that folks have disincentives the reveal information when they can profit from secrecy.
This is a reason to want more kinds of info to be directly rewarded
Not necessarily, since rewarding some uses of information (like betting on it) punishes (some) information sharing.
I think you must acknowledge at least the theoretical possibility that, on balance, prediction markets will decrease the sharing of vital information more than augmenting it.
A few investors foresaw the problems as early as 2005, as described in the book The Big Short.
Reading this in the newsfeed reader was impossible, since the quotes are done with p tags (whose padded-left style gets stripped) instead of the more reasonable blockquote tags.
I'd bet this will be fixed in the mid to long term.
Stephen, stocks which can't be bet against (unshortable and no puts available) often become astronomically overvalued and badly misunderstood.
"But your point is valuable in foreseeing the cultural consequences of prediction markets. These would include not just information hoarding but increased promotion activity as opposed to disinterested discussion."
The talk surrounding unshortable stocks is anything but enlightened, disinterested, discussion. It is the most gullible, naive BS out there. Because when bad info is silenced, overoptimism results, which filters out non-loons. The absence of Shorts doesn't shut up the Longs; it emboldens them to spew nonsense. See Afro Studies for an analog.
Not necessarily more information sharing on balance, even after he shorts: withheld is adverse information. (Also, general understandings that help you predict in the future may be withheld, unless its value of inducing conviction in the present case is great.)
But your point is valuable in foreseeing the cultural consequences of prediction markets. These would include not just information hoarding but increased promotion activity as opposed to disinterested discussion.
And (relatively) disinterested discussion is a fragile public good.
[Added.]There is one important difference (in degree) between the typical investment market and prediction markets: the period during which a position is established (if I'm using the term correctly) is apt to be much longer in many prediction markets, as it may include many years during which the speculator in predictions develops the understanding on which the prediction is based.
But some here have claimed that market prices reveal the important information.
No one claims that a small number of market prices reveals all possible related info.
What if everyone else has been keeping the number of die rolls they've seen, and their outcomes, secret? <irony> I thought all you needed was the market price!</irony>
Stephen, you're wrong. Once an investor shorts a stock, he publicizes his thesis relentlessly. Sure, while he's accumulating his short position he keeps his thesis quiet. But once short, he promotes to speed up the price adjustment process.
Net result: far more info sharing.
Why would it work different in other contexts?
"In an efficient market, with no information asymmmetry and other ideal assumptions, you expect nobody to have a non-zero average return."
Actually you do because there are always unforeseen events (such as natural disasters or changes in fashion) that even a perfectly efficient market cannot predict, but even if that were not true you'd still expect some players to get lucky over finite sequences of transactions and it just so happens that human lifespans are finite.
"If you buy a stock, it will usually pay you dividends, but it the stock was correctly priced, as the efficiency assumption entails, then all these dividends, appropriately discounted, were already accounted for in the price you paid."
And you'd still make an 8% annual gross profit.
Whether or not insiders or experts can beat the market depends on what it is that market is selling.
Really, they "foresaw" the problems before the problems came about? Did they act before the collapse of Lehman brothers?
FYI, I'm just saying there's a difference between markets where most people have a stake in the underlying goods or services and markets that are purely speculative. I actually believe in the case of the housing crisis the detachment would have served a prediction market well: a prediction market in 2005 based around the sustainability over say 5 years of the housing market would probably have leaned towards predicting trouble within those 5 years, whereas the actual housing market suffers from self-fulfilling prophecies and people trying to cash in right before the next bubble bursts. But there are also cases where detachment is not a good thing. I guess shortselling mortgages on a 5 year term is already a bit like a prediction market, it would be interesting to look at such markets (which you've probably done in much greater detail than I have). Oh, and you should really try to get prediction markets going in the UK (and/or Macau) if you want to empirically test them.
Pointless quibble: Depending on how the original probabilities were arrived at, like "We previously saw five 4s and none of any other number, so we figured it wasn't a fair die", you might want to bet quite a lot differently from the previous distribution after seeing a single 6. Less pointlessly: Ronfar, if you have some math background, check out the Dirichlet prior and the Good-Turing estimator for some general principles on adjusting probabilities on this kind of sampling problem.
You would raise the price on #6 up to say 5.1%. Just how much you move it up depends on just how many dice rolls everyone else has seen before.
I have a question about prediction markets and information sharing.
Let's say that there's a 6-sided die with a bias in favor of one of the sides. The bias is currently unknown, but there's a prediction market on what the die will roll on a specific future occasion. Other people have gotten a chance to roll the die, and the current market estimate of the probabilities of rolling each number is:
1: 5%2: 5%3: 5%4: 75%5: 5%6: 5%
I get a chance to roll the die once, and it comes up 6. This is new, relevant information that only I have. How should I bet so as to communicate this information?
I invite the reader to try and identify a single instance in which a “deep structural parameter” has been estimated in a way that has affected the profession’s beliefs about the nature of preferences or production technologies or to identify a meaningful hypothesis about economic behavior that has fallen into disrepute because of a formal statistical test.The Scientific Illusion in Empirical Macroeconomics, Lawrence H. SummersThe Scandinavian Journal of Economics, Vol. 93, No. 2, Proceedings of a Conference on NewApproaches to Empirical Macroeconomics. (Jun., 1991), pp. 129-148
Folks have incentives to reveal the info that is directly rewarded, but not the info that is not directly rewarded.
The relevant point is that folks have disincentives the reveal information when they can profit from secrecy.
This is a reason to want more kinds of info to be directly rewarded
Not necessarily, since rewarding some uses of information (like betting on it) punishes (some) information sharing.
I think you must acknowledge at least the theoretical possibility that, on balance, prediction markets will decrease the sharing of vital information more than augmenting it.
After they had been trading grossly overpriced
Mortgage-backed securities for years.