Commentator Brian recently pointed to a speech by Michael Crichton which quoted a saying attributed to Mark Twain: "I’ve seen a heap of trouble in my life, and most of it never came to pass." As Eliezer
Good news for you Melinda Doolittle fans! She’s set to release her debut album titled, Coming Back to You on Hi-Fi Recordings in January 09. Produced by Grammy-nominated producer Mike Mangini (Joss Stone, Run DMC, The Jonas Brothers), Coming Back to You was recorded with a team of live musicians in Nashville and New York City.
The first single, “It’s Your Love” will be released to radio in October.
“Keep yourself updated with Melinda’s career at melindasbackups.
melindasbackups.com is a web site owned by Melinda Doolittle. Melinda’s Backups™ is a non-profit supportive association inspired by Melinda and authorized by her to operate this web site on behalf of her fans.
sa, you're right: option prices allow one to calculate the whole probability density of future prices, including the probability of sharp devaluations. But this is a rational prediction rather than a "bias", hence there's no way to take advantage of it.
The bias Barkley points out perhaps explains one of the discrepancies I noticed between polling and markets, the prediction of future real estate prices. CME housing futures are trending down while the poll had more people predicting increased than decreased prices. It could be that this represents a consensus of a good probability of a modest price increase combined with a low but significant probability of a major crash. Or putting it another way, although more people think prices will go up than down, the ones who think they are going down expect a bigger change than the ones who think they are going up. So perhaps there is more consistency here than I thought.
It's frustrating to me that pollsters so seldom ask people to predict the future. Pollsters are more interested in how people feel about current affairs than in what they think will happen, it seems.
interesting comment by barkley above. i have question for him-this seems similar to the volatility smile/skew that regularly appears in options prices of certain assets(like brazilian coffee/us equities after 1987);faced with such a price action how can one take advantage of this bias?
Something one needs to be careful about here is what is known in international finance as the "peso problem," which can arise if an underlying distribution is skewed in one direction. Thus in small samples observed means will not equal population means if one does not observe an extreme tail event.
The original example was studied by Kenneth Rogoff in his Ph.D. thesis at MIT in 1979. The "peso problem" was that the forward market for the Mexican peso was consistently undepredicting the actually realized, eventual spot values of said peso. They were regularly forecasting devaluations that did not happen.
Rogoff's solution, consistent with rational expectations, was to note that the distribution on peso movements was skewed to the downside, that it rarely was revalued upwards against the US dollar, but from time to time it would sharply devalued downwards. So, the ratex agent would be factoring in this small probability of this large devaluation, which would lower the forward market valuation of the peso. However, since these large devaluations only happened once in a while, one would regularly see the spot value of the peso doing better than what was forecast in the forward market.
Bruce, that is a good question and it is probably an exaggeration to say that betting markets are "free of bias". Any kind of institution can be subject to some biases or other. The difference with betting markets is that participants are putting money behind their claims, so that any biases can be exploited by others at the expense of those making the biased claims. And this exploitation will tend to reduce the bias in the market. The main point is that this is unlike the other kinds of futuristic predictions described by Eliezer, where there are virtually no incentives to be unbiased or penalties for even rather wildly incorrect predictions.
great post. it might be relevant to say here that with the advent of internet and electronic archive search, compiling an expert accuracy score much easier than it used to be. this is esp true for equity/fixed income/commodities strategists who don't trade but are always on tv and in the news.
Hal: Finally, about American Idol -Intrade has Melinda Dolittle as a shoe-in, with an outright majorityat 53% odds, 3 times better than the next contestant.
When weighing the odds I would figure that Melinda, the guy with the funky hair and the replica of Mr. Timberlink:) have more of a chance but how to assume the odds aren't already decided? I might have an opinion to what is the majority of thought but does it really matter? Probably not but it's at least interesting to know "what" is the majority of favorite opinion.
Good news for you Melinda Doolittle fans! She’s set to release her debut album titled, Coming Back to You on Hi-Fi Recordings in January 09. Produced by Grammy-nominated producer Mike Mangini (Joss Stone, Run DMC, The Jonas Brothers), Coming Back to You was recorded with a team of live musicians in Nashville and New York City.
The first single, “It’s Your Love” will be released to radio in October.
“Keep yourself updated with Melinda’s career at melindasbackups.
melindasbackups.com is a web site owned by Melinda Doolittle. Melinda’s Backups™ is a non-profit supportive association inspired by Melinda and authorized by her to operate this web site on behalf of her fans.
sa, you're right: option prices allow one to calculate the whole probability density of future prices, including the probability of sharp devaluations. But this is a rational prediction rather than a "bias", hence there's no way to take advantage of it.
The bias Barkley points out perhaps explains one of the discrepancies I noticed between polling and markets, the prediction of future real estate prices. CME housing futures are trending down while the poll had more people predicting increased than decreased prices. It could be that this represents a consensus of a good probability of a modest price increase combined with a low but significant probability of a major crash. Or putting it another way, although more people think prices will go up than down, the ones who think they are going down expect a bigger change than the ones who think they are going up. So perhaps there is more consistency here than I thought.
It's frustrating to me that pollsters so seldom ask people to predict the future. Pollsters are more interested in how people feel about current affairs than in what they think will happen, it seems.
interesting comment by barkley above. i have question for him-this seems similar to the volatility smile/skew that regularly appears in options prices of certain assets(like brazilian coffee/us equities after 1987);faced with such a price action how can one take advantage of this bias?
Something one needs to be careful about here is what is known in international finance as the "peso problem," which can arise if an underlying distribution is skewed in one direction. Thus in small samples observed means will not equal population means if one does not observe an extreme tail event.
The original example was studied by Kenneth Rogoff in his Ph.D. thesis at MIT in 1979. The "peso problem" was that the forward market for the Mexican peso was consistently undepredicting the actually realized, eventual spot values of said peso. They were regularly forecasting devaluations that did not happen.
Rogoff's solution, consistent with rational expectations, was to note that the distribution on peso movements was skewed to the downside, that it rarely was revalued upwards against the US dollar, but from time to time it would sharply devalued downwards. So, the ratex agent would be factoring in this small probability of this large devaluation, which would lower the forward market valuation of the peso. However, since these large devaluations only happened once in a while, one would regularly see the spot value of the peso doing better than what was forecast in the forward market.
Bruce, that is a good question and it is probably an exaggeration to say that betting markets are "free of bias". Any kind of institution can be subject to some biases or other. The difference with betting markets is that participants are putting money behind their claims, so that any biases can be exploited by others at the expense of those making the biased claims. And this exploitation will tend to reduce the bias in the market. The main point is that this is unlike the other kinds of futuristic predictions described by Eliezer, where there are virtually no incentives to be unbiased or penalties for even rather wildly incorrect predictions.
great post. it might be relevant to say here that with the advent of internet and electronic archive search, compiling an expert accuracy score much easier than it used to be. this is esp true for equity/fixed income/commodities strategists who don't trade but are always on tv and in the news.
Hal: Finally, about American Idol -Intrade has Melinda Dolittle as a shoe-in, with an outright majorityat 53% odds, 3 times better than the next contestant.
When weighing the odds I would figure that Melinda, the guy with the funky hair and the replica of Mr. Timberlink:) have more of a chance but how to assume the odds aren't already decided? I might have an opinion to what is the majority of thought but does it really matter? Probably not but it's at least interesting to know "what" is the majority of favorite opinion.
ThanksAnna
Why do you say that futures markets can be 'expected to be reasonably free of bias?'