Traders don't have to shift markets only through differential pricing. They can shift markets the old fashioned way, through marketing and disinformation.

How much are corporations spending to influence the election? Billions? If corporations and individuals are willing to spend millions, tens of millions and even billions on shifting public opinion, presumably they would be willing do the same thing with oil trading profits which are from pre-tax income.

What does all the saber rattling about war with Iran do to oil prices? It drives them up. Who is rattling sabers about war with Iran? Mostly the GOP. Who does the GOP blame for high oil prices? Obama.

The price of oil has two components, its actual value as a commodity used to supply energy and other things. The price also has a component of signaling. This component signals the relative risk that future prices will be higher or lower.

Oil Users make profits using oil to produce other things. Oil Speculators make profits by capturing differences between the signaling prices at different times. The signaling can be manipulated easily, just rattle the sabers with Iran. Oil Users have to take potential future disruptions seriously because they have more to lose than speculators. Oil Users have the financial risk of not recovering their investment in what ever factory it is that they use to turn oil into products that they sell.

If you look at the ratio of US oil consumption to GDP, there are large fluctuations.


with GDP varying between 100x oil consumption (1999) and 15x oil consumption (2008).

Oil users with a lower GDP production to oil consumption ratio have a reduced ability to tolerate higher oil prices. Oil is not the only component of what goes into their production of GDP. Oil is the only component of an Oil Speculators production of GDP.

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McCluskey's followup: http://www.bayesianinvestor...

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Peter_McCluskey: The trader doesn't have to fundamentally shift the market. He just has to make one trade show up right before the cutoff point for your measure, thus making "the" price where he wants it to be.

I'm not suggesting that voters are sensitive to daily price changes, only that they're sensitive to changes over months in prices they pay at the pump, and traders may change their predictions about that effect as fast as oil futures change.

Okay, point made. But then, the reverse correlation problem could show up on election day too. The oil prices change voters' minds as going to polls, which changes odds, which affect futures on financial markets, which affect oil prices ...

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Silas, the December 2011 oil futures are currently traded heavily enough that a trader could not reasonably expect to manipulate the results of the shock response future contract without trading oil futures worth millions of dollars.I'm not suggesting that voters are sensitive to daily price changes, only that they're sensitive to changes over months in prices they pay at the pump, and traders may change their predictions about that effect as fast as oil futures change.

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Peter_McCluskey: Can you describe a more plausible way in which shock response futures would reflect (a week before the election) a causality other than election results causing change in oil prices?

I can imagine on election day, an errant trader might eat a 2% trading loss ($2000 on a $100,000 trade) just to make it look like "Democrats cause higher oil prices", or because he stands to win more than $2000 on shock futures that he's bought. (Just like someone took a loss with $100 oil because of other goals.) People buying futures, then, have to incorporate the risk of this, as well as the risk of anything with a larger magnitude than the election results and opposite in sign.

I think it's a good point that my metric might capture causality in the opposite direction, i.e. people change their votes (which changes the odds) because futures prices change. However, traders more closely monitor conditions that could affect their portfolios (because of the financial interest) than voters monitor conditions that could affect their votes, so traders are much more sensitive to small changes in election odds, than voters are sensitive to small changes in futures prices. Thus, a correlation is more likely to indicate the odds --> futures-prices causation direction.

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I don't want to establish these particular indicators as standard measures for voters to use. But mnuez's suggestions that people use a larger number of more special purpose indicators would be a step in the wrong direction, as the more indicators that people attempt to use, the easier it will be to emphasize those that support one's biases.I want future decision markets to try to use a few broader measures of wellbeing that capture a larger portion of what it is that people want to maximize.One such measure that I have some desire to use is life expectancy.One reason I haven't used that is that I suspect fewer people have useful knowledge of how politicians affect life expectancy, so it's harder to attract informed traders with the kind of subsidies I'm currently willing to provide.Another reason is that the effects of politicians on life expectancy will take longer to become measurable, and Intrade's business model does not encourage them to design their system to make long-term forecasts work well.

Silas, I can imagine that the correlations you want are caused by, say, increased oil prices causing voters to prefer a Democrat.I could imagine that we see something similar with the benefit of hindsight for the shock response future contract (i.e. a sudden surge in oil prices starting on Monday afternoon of election week influencing the election result). But in order for that to affect the shock response future price weeks before the election, the shock response future price would need to incorporate an expected last minute oil price surge better than oil futures prices do. I find that far-fetched. Can you describe a more plausible way in which shock response futures would reflect (a week before the election) a causality other than election results causing change in oil prices?

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Robin_Hanson: Neither would an election-day-only correlation, as Peter_McCluskey's is. Was your point that the months-long, day-to-day correlation is necessarily unrelated to the causation direction, while the election-day-only correlation is strongly related to the causation direction? Or was it a more general point about "correlation != causation"?

If the former, I disagree. Any countervailing event on election day (like the errant $100 oil trader) larger than the magnitude of the candidate's effect, flips the sign. In contrast, on my metric, those events must also operate for n days, consistently in the same direction as changes in the candidate's changes. That why I bring up that my metric is more statistically significant.

And any chance of taming the italic tag?

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Silas, a consistent correlation would not show the direction of causation.

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Robin_Hanson: That would be a valid point if I were proposing simply comparing the initial and final values. But my method involves comparing the correlation over a succession of days. To win on my metric, the economic variable would have consistently, over a longer time, move in the same direction as the candidate's chances.

In any case, financial markets on election day close before the results are in, or close to certain.

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Silas, I mispoke. The point is to disentangle the direction of causation. On election day most of the causation goes from election to other parameters. Over the preceding months it is much less clear.

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"effect oil prices" --> "affect oil prices"

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Mnu, surely higher and lower oil prices, or troops in Iraq, can't both benefit the wealthy.

Law of Acquisition #35: Peace is good for business.Law of Acquisition #36: War is good for business.

Either condition can open up new and exploitable niches for the wealthy. They probably won't be the same ones, but they'll be there all the same. It is entirely possible that both higher oil prices and lower oil prices would benefit the wealthy.

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Robin_Hanson: There seems to be a miscommunication here.

Peter_McCluskey's idea involves people betting on the eventual value of a metric that takes as input the events on election day.

My idea involves people betting on the eventual value of a metric that takes as input the events on election day and n months preceeding.

In what sense does Peter_McCluskey's idea involve a measure that is available before mine?

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Silas, we want a measure available well before the election.

Mnu, surely higher and lower oil prices, or troops in Iraq, can't both benefit the wealthy.

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The formatting was perfect the first time I attempted publishing. Thanks for giving me the run around Robin.

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An error occurred...

We're sorry, your comment has not been publishedbecause TypePad's antispam filter has flagged it as potential commentspam. It has been held for review by the blog'sauthor.

Wow. Just wow.

Okay, let's try again.

Robin, you have no fascistic tendencies in your censorship fetish.You've overcome all bias and truly desire a "tighter" comment systembecause of the masses of threatening, spam and unintelligible commentsthat so clearly flood this site every day. And of course you arealways right and never wrong. And to prove that point let me show youwhat an ignorant fool would write if he were trying to comment on thispost. Of course my own opinions are diametrically opposed tothose of this terribly biased idiot. I'm with you. We're alland always with you. (But I may as well sign on from adifferent computer with a different login name anyway.)

Okay, I'm a big fan of futures markets. They fascinate mephilosophically, psychologically and mathematically and I thereforeappreciate that you bring your learned knowledge of the matter to ourattention. But, as usual, you surreptitiously slip your own biasesinto the mix - and what's worse - you do so in the push-polling mannerthat makes it look as though your biases were actually our own ideasin the first place.

Now I know that this will only prompt you to more vigorous calls forcomment censorship (something quite extraordinary in a blog actuallynamed "Overcoming Bias") but Robin, I need to point out thatyour piece opened with the line: "We have had many prediction marketson who will be elected, but almost none on who should beelected."

You then went on to inform us of the good news to the extent thatthis problem is now being rectified on account of our being newly ableto bet on oil prices, government debt, etc. But Robin, if our goal, isovercoming bias can't you see that the creation of theseparticular markets contribute to rather than lessen our biasesas to what's important?

Look, I realize that a blog post can't cover every single aspect ofthe subject under scrutiny but the fact that you consistentlytry to pass off economic factors that favor the wealthy as "objective"economic preferences that we should all advocate for and as thebarometers for success that policy-makers should focus theirattentions on draws me to the required stand to point out thosebiases.

As I've referencedhere before, youknow good and well that the majority of the citizens of thiscountry would live happier, longer lives if our national economicpolicies (as well as moral attitudes) were more New-Dealish thanMilton-Friedmanish. That being the case, the barometers that mightbest inform us as to "who should be elected" are more along thelines of looking at rates of inequality, rates of homelessness, ratesof uninsured citizens, wages for blue-collar jobs, purchasing poweretc. - unlessof course you "lookdown on patriotism and piety of every kind", in which case thehunger of billions is but a hill of beans as compared with theimmorality of demanding that the wealthy be bereft of a few moredollars of their "hard earned" cash.

So Robin, the creation of these markets increases bias.They inform the masses who come to be aware of them that theseare the important factors to take into account when choosing fromamong presidential candidates. Which, as implied earlier, is<exactly< i=""> what the repugnant push-poll accomplishes as well.

I could go on responding in advance to potential rejoinders such as"so go make your own markets" and other such zingers but you've madeit quite clear that critical comments are less than appreciated hereso I'll tiptoe my way out.


mnu ezmnu ez . blogspot . com

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