Tuesday, May 13, 2008

Mark Gongloff is skeptical of prediction market traders


Economists have touted for years the idea that markets -- whether on political futures or oil futures -- can be used broadly to get a better read on the uncertain future.

This election season is a reminder of the limits of the idea.

"What you're doing is collecting bits and pieces of information and aggregating it so we can watch it and understand what people know," says California Institute of Technology economist Charles Plott, a leading light in experimental economics. "People picked this up and called it the 'wisdom of crowds' and other things, but a lot of that is just hype."

The problem with these markets, Mr. Plott says, isn't that they are thinly traded, a common complaint, but that they are often plagued by bad information. That leads to bubbles, head-fakes and manipulation -- just like in the stock markets.

I concede that no trader can predict the future all the time, and also that prediction markets have a success rate of less than 100%.

However, do traders in other markets do significantly better? (Um, no). And prediction markets do better than polls.

I'm surprised that the WSJ spotted him the space for this column. Let's not make Perfect the enemy of Good.

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