Wednesday, April 18, 2007

Chris Masse is losing his nerve when it comes the relevancy of prediction markets on complex questions

He asserts:

#1. The average temperature of the Planet Earth is difficult to get. Think of the difficulty to gather the data from the different points (Virginia, the North Pole, South Africa, the oceans, the French Riviera, the Canadian big lakes, Indonesia, etc.).

#2. The scientists don’t have a perfect global model, yet.

TAKEAWAY: I understand that many traders would believe in “global warming” and buy up such an event derivative, but where would they get advanced indicators on future temperatures?? Past data is not of help if you don’t know how to interpret them. You don’t just buy up a global warming event derivative just because temperatures have risen in the past and that you believe religiously in global warming.

to which I replied:

Uhh, Chris, people buy stuff all the time that is not good for them.

Look at lottery tickets–you put down a dollar to win 30 - 35 cents. First, the lottery masters keep a third of the collection for overhead and public financing. Then they payout the other two-thirds. Then they tax the two-thirds. And remember, that dollar was after-tax money.

People will buy this. If priced aggressively enough, I will sell it.

Our risk models are not perfect, either. Ever hear about LTCM or Amaranth? So don’t hide behind that shrubbery.

When things get difficult, that’s when prediction markets can inject some information. Sure, it won’t be perfect information. But, you and I agree, markets outperform polls when it comes to revealing the truth.

C'mon, Chris, grow another pair (of reasons).

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