Via Adam Siegel of Inkling Markets,
John McQuaid of Wired.
- It’-s incoherent to start a rant against prediction markets by this upbeat line, “-Prediction markets can be spookily accurate.”-
- He blames the New Hampshire upset on poor liquidity. Where is the scientific evidence of that? Total invention by our good friend Barry Ritholtz. The New Hampshire prediction markets were wrong because the advanced, primary indicators (the polls) were wrong. As simple as that. [For why the polls were wrong, see: The New York Times, Zogby, Rasmussen, Gallup…]
- Prediction markets “-have a lot of political junkies but few real insiders or outsiders, so they’-re not very good at catching something the polls might miss.”- Hummm…- Most of the “-real insiders”- don’-t keep scoops for themselves (if and when they have some), they are too happy to act as a source for some thirsty journalists or bloggers, so as to have their name printed somewhere. Hence, the political junkies would be able to aggregate any kind of extraordinary information —-if that were to happen.
- How could the prediction markets “-get out ahead of conventional wisdom”-? It’-s impossible, other than by reversing our psychological arrow of time (remembering the future, instead of the past). At the contrary, the job of the prediction markets is to quantify exactly that so-called “-conventional wisdom”-. They won’-t go further, and we’-re happy to run with that, because, that way, we are not prisoner of the bias of a handful of experts. Plus, prediction markets give us an objective probability of event outcome —-a thing that individual experts can’-t give us.
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The excerpt below is good enough, though:
[…] But forecasting also needs more so-called noise traders, who do business with almost no information. Noise traders boost accuracy by increasing volume and the potential profits of informed traders. Diversity helps, too. If you can get different types of people to play, experts say, not only do you get a bigger pool and more information, but differing random guesses will cancel each other out, leaving real signals to rise above the noise. Plus, if you have a critical mass of investors with a variety of backgrounds, locations, and interests, they are less likely to move as a herd. […]
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Previous blog posts by Chris F. Masse:
- A second look at HedgeStreet’s comment to the CFTC about “event markets”
- Since YooPick opened their door, Midas Oracle has been getting, daily, 2 or 3 dozens referrals from FaceBook.
- US presidential hopeful John McCain hates the Midas Oracle bloggers.
- If you have tried to contact Chris Masse thru the Midas Oracle Contact Form, I’m terribly sorry to inform you that your message was not delivered to the recipient.
- THE CFTC’s SECRET AGENDA —UNVEILED.
- “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.”
- Meet professor Thomas W. Malone (on the right), from the MIT’s Center for Collective Intelligence.
NYSE volume today was light — about 1.1 Billion shares.
Today, the Obama to win the US Presidency traded 896 contracts; McCain traded 830. Hillary was the most active — 4399, I would guess mostly shorts betting shes a zero.
These are just shares — do we even want to compare dollar volumes?
In other words, on a slow day, the NYSE trades a huge multiple of all the trades on all of the prediction markets combined — since their inception.
Invention? Only for those of us who who cannot count beyond their fingers and toes.
(Love ya anyway Chris!)
@Barry Ritholtz: You could have 10,000 times more trades that the InTrade prediction markets would have still been wrong.
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Wrong argument.
[…] like him to take their market-generated probabilities seriously. Barry Ritholtz is keen to tout oranges–apples comparisons: the NYSE volumes versus the Obama–Clinton volumes at InTrade. It’s a bullshit argument, but he managed to persuade some gullible journalists writing for […]
Here is where I think we disagree: I believe that the greater the number of traders involved in a market, and the greater amounts of incentive at stake, the more likely you are to have a market with increasing potential to present a future discounting mechanism.
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We know why you prediction markets (like the fixed income market) have a future forecasting value: it is the sum total of all the knowledge, experience, and expectations, of investors with significant money at stake.
My issue with markets like In Intrade, is that they lack this depth of information and knowledge, primarily due to the lack of trading volume, number of traders, and money at stake.
@Barry Ritholtz: In the New Hampshire case, where the polls were wrong, higher volumes would have not helped. You just can’t divine the future —you can just aggregate current information. If your primary indicators give you inaccurate signals, then you’re doomed —whatever the trading volumes.
[…] I have been telling that to Barry Ritholtz —but he stays on his position. […]
I’m with Barry on this one, if I had to choose.
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All we need is the opportunity for people to make money. Where there’s money to be made, there will be expertise. The polls under these circumstances, no matter how accurate, will just be one source of information. There will be people with superior knowledge (for instance those who understand about the flaws of certain polls).
This is nothing new… we have been talking about the superiority of prediction markets in comparison with polls, after all.
I think there is an extra dimension of “time” with prediction markets. Shrewd money tends to become stronger, so if someone is shrewd and is able to accumulate wealth through accurate predictions, money is transferred towards those who have skill, or other (savoury or unsavoury) edges.
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Initial prediction markets in an area may be quite ‘loose’, but over time will become stronger.
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I love the bit about “how can prediction markets get ahead of conventional wisdom”
. That is genius 
. Financial motives are probably the closest to paramount for the vast majority of people (in most cases a good thing), and prediction markets give people the chance to literally put their money where their mouth is, at the very cutting edge of taking on conventional wisdom :-).
Yes, now I know why I “had to choose”.
Markets will be loose at first, and become stronger with time.
It must have been the bookies who determined the price on betfair at first, now it’s the other way around. It takes time to beat the “experts”.
@Medemi: The superiority of prediction markets over polls is a small, long-term, statistical thing,.
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Practically, the traders feed on polls and experts.
@Ed Murray: Agree with your first part, at least.
@Medemi: It beats some experts, but I would bet BetFair and an average of 1,000 experts would agree on the same price/probability.
Chris,
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I’ve analysed an extensive set of data, consisting of every soccer match played in europe from 2002 and onwards.
One thing you will learn is that markets become more efficient (more accurate) over time.
This can only happen when there’s a lot of money to be made. It acts as an incentive which, over time, will translate into more accurate markets.
It’s not like the odds compilers at the bookies became smarter during this period. It’s something else.
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For you to say that the superiority of prediction markets is a long-term statistical one, is a bit disappointing.
It will be a fundamental one, given the right circumstances. Which we simply don’t have in the US today.
To what degree, is dependent on a number of factors (like type of market / market characteristics) but the general principle will always hold true.
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You stick to your facts, and I will stick to my wisdom.
@Medemi: I didn’t say that the prediction markets are not robust. i said that the accuracy of the political prediction markets is close to the accuracy of the polls.
http://www.stat.columbia.edu/~…..cal_m.html
You know, I have to smile when I read some of these articles. Pseudo-scientists looking for evidence to support their prejudiced beliefs.
That’s why we need high liquidity money-to-be-made prediction markets. To teach them a lesson !