Prediction tools

Rounded up by Ian Ayres (via Greg Mankiw, and more links in his comments).

Prediction market and Jay Leno on Hillary

[Via Don Luskin] Good one from Leno:

"Speaking at a forum organized by Lance Armstrong on cancer research, Hillary Clinton told Chris Matthews if she is elected president, she will declare war on cancer, and then she will support the war on cancer for two years, and then she will be against it for a year, and then she will back out of it all together.

The National Debt Clock is turned on

I was just picking up lunch on 44th Street & 6th Av, when I saw the Debt Clock turned on--it had been turned off after the federal surplus caused it to count down. But the debt is growing again, so I guess whoever owns it thought it would be good to turn it back on.

It currently shows our national debt is $8.9 trillion and my family's share is $96,000.

I remember seeing this as a teen and even twentysomething (when the numbers were lower), and thought this a bit dire. But it never occurred to me to expand my understanding of the asset or credit side of things until I aged a bit more. American household net worth is at an all-time high, $56 trillion (a partial summary: $70 tril in total assets, $14 tril in total liabilities, of which real estate is valued at $20 tril and mortgage debt $10 tril).

Does that mean that my family's share of national assets is $600,000? A more accurate picture of a family's share of national debt is the relative federal tax they've paid and are expected to pay. It's just as silly for a journalist or electronic billboard to hold my 2 kids responsible for half the mortgage debt that my wife and I took out to buy our apartment.

Like some of the nonsense we see around the celebrity obsession by the media and the people who prefer it, this is more of the same. For an enlightening look at U.S. national debt, check out Steve Conover.

Discovering the market for yourself

Conan O'Brien at the Stuyvesant H.S. commencement (via Greg Mankiw):

I don’t want to freak you guys out, but twenty five years ago, I could have been any one of you. I went to a public high school, and I was a bright, ambitious, hard working kid who wanted more than anything to go to a good college. The only problem is, I was much more interested in succeeding than in really learning. When you’re a smart kid in a competitive school, it’s an easy trap to fall into. So I did a lot of things in high school not because I enjoyed them but because I thought they look good on an application. I think you know what I’m talking about. I was on a debate team — hated it. I ran track — I was terrible, I got so bored running the two mile that I tried to talk with my opponents during the race. “what are you gonna do later, I mean you gonna be doing something later?” I joined school government — hated it. Of course, like many of you I worried obsessively about my GPA and my SAT scores. And of course, it worked. I got into the college of my choice and to this day I’m proud of the work I did in high school.

But old habits die hard. Once I got into college, I had every intention of joylessly grinding away again. I was gonna turn college into just another step on the road to being successful, whatever that meant. I told people my plan was to go to graduate school in law or government, just because I thought that’s what smart people were supposed to do. And then something really weird happened. My roommate — by the way, he was the weird roommate — my roommate was going to an orientation meeting at the Harvard Lampoon, the school humor magazine, and I decided for some reason to tag along. I wrote one piece, then I wrote another piece, then another. Before long, I was running the place. The only difference was, I was joyously happy. I was succeeding at something because I loved the process, not because I was trying to get anywhere. I had found the thing I wanted to do for the rest of my life, and I honestly didn’t care where it took me or what it paid.

So when I graduated form college in 1985 I told my parents “thanks for the amazing Ivy League education, now I want to be a comedian.” Later, in the emergency room after they woke up, they said they were fine with my decision, and I was on my way. I’ve had a lot of highs, I’ve had my share of lows, but if I hadn’t allowed myself to experiment and risk doing something without a clear career payoff, I might have missed out on so much. I never would have written for Saturday Night Live. I wouldn’t have preformed in stage in Chicago in a diaper in 1988. I never would have spent hours crafting the Homer Simpson line, “the bee bit my bottom and now my bottom is big.” I never would have jumped out of a window in the South Park movie. I never would have danced with the masturbating bear or been pooped on by Triumph the insult Comic Dog. I never would have swam naked in Arctic water with the Finnish Ministry of Defense. Yes, it’s been a wasted life. But I honestly believe that I found the best use for Conan O’ Brien. Don’t get me wrong, I’ve worked extremely hard at being an ass, and yes I’ve made some sweet, sweet coin. I do very well. (applause)

The point is, at this moment, many of you have ideas of what you want to do with your life, but for many of you those ideas will change. And that’s because you think you know who you are right now, but you really don’t. Trust me, when I look back at 18 year old Conan it’s a ridiculous sight — six feet four inches of pale skin and bone, scared of girls, squeaky voice — I’m sorry, that’s 43 year old Conan. But life and the choices I made have changed me in a thousand ways. None of it would have happened if I had rigidly kept my eyes on the prize and decided with great determination to follow my dream, because I didn’t have the slightest idea what my dream was when I was 18. It had to find me. So enjoy the next phase of your life, make sure you enjoy today as well. You’ve all achieved something pretty remarkable today and you should be infinitely proud.

With some of my spiritual colleagues, we call this calling.

Bernanke not just smarter than Greenspan ...

But STRONGER, too:

[today's WSJ] We think, instead, that Mr. Bernanke has been doing well these last few weeks by resisting this belief in the Fed as Yahweh. The central bank has been doing good work in its role as a financial system plumber, plugging leaks as they spring up, and in reassuring banks that its liquidity window is open. Mr. Bernanke has done especially well to resist being bullied by Wall Street, the homebuilders, automakers and easy-money editorialists into opening the broader credit spigots.

Mr. Bernanke is in part a hostage to the legacy of the Alan Greenspan era, when the Fed seemed to ride to the rescue during every financial crisis. This is the famous "Greenspan put," which is as much legend as reality. The current market and media pleas to Mr. Bernanke are in part an attempt to get the new Fed chief to behave as if it is something of a guarantee. But the Fed doesn't have the same flexibility now, in part because its reckless policy in the early part of this decade helped produce the credit excesses we are now trying to work off.

The Fed's first obligation isn't to reflate the bubble but is to protect the larger economy and especially price stability. One economic reality today is that the Fed's debt subsidy led to a misallocation of resources into real estate and certain debt instruments that is in the process of being worked off. The losses are real, and someone will have to pay them. Housing prices will fall in some markets for some time to come. There is no joy in saying so, but this is what happens when credit is no longer subsidized and markets change their risk assessments.

The Fed may well have to act if the economy does begin to stumble. But if that happens, the Fed isn't the only or even the best policy lever. Fiscal policy is also available, which means the Bush Administration and Congress should be considering another tax cut. A tax cut could revive incentives for risk-taking among those feeling burned by the housing fallout. The federal deficit is heading down to 1% of GDP, and nothing would be worse for tax receipts than a recession.

We realize tax cutting is taboo in today's Washington, but if the Presidential candidates aren't considering a tax cut proposal, they should be. The entreaties of Wall Street notwithstanding, the Federal Reserve is no miracle worker.

Bias in subprime market like bias in medicine

Something bad happens. Politicians (policy doctors) recommend regulation, which will prevent the bad thing from happening again. Another bad thing happens, but instead of concluding that regulation did not work as promised, regulation is increased.

Arnold Kling looks at the problem of bias, from the shared perspective of doctors, patients, and pro-regulation crowd:

It is better to be certainly wrong than statistically right. That is, doctors and patients feel better if the doctor makes a diagnosis based on intuition about the specific case rather than based on some statistical model.

In hindsight, it often appears that one could have made the right decision using better intuition. That is why an anecdotal approach to looking at medical decision-making is biased in favor of intuition and against statistical models. That same sort of bias is at work in the cries for more regulation of financial markets in wake of the subprime mortgage problems. In hindsight, you think that a regulator could have prevented the problem. But that is a biased perception.

Wait, so higher tax rates DO impact productivity?

Why is this such a controversial finding? No free lunch?

Tyler Cowen on the theology of popular economics

He posts:

I view Discover Your Inner Economist as largely Thomist and more Catholic than anything else.

It is suggested that people are capable of simply doing the right thing, although we should not necessarily expect them to do the right thing.

It is suggested that a unified perspective of faith and reason, applied in voluntarist fashion, can indeed give people better and more complete lives.

It is suggested that not everything can be bought and sold, yet markets have a very important role in human life.

The chapters on food, or the seven deadly sins, are too obvious to require explanation.

The book is highly cosmopolitan, and it is suggested that acts of will and understanding can open up the sacraments to us. The possibility of those sacraments lies right before our very eyes, and they are literally available for free. Except the relevant sacraments are those of culture, and not of the Roman Church.

I am not a Catholic or for that matter a believer, but as I tried to solve various problems in the exposition, the argument fell naturally into religious ideas. Religion has so much power over the human mind, in part, because its basic teachings about life are largely true. Furthermore classical liberalism is far more of an intellectual offshoot of Christianity than most non-Christians are keen to admit. (Muslims and Chinese often see this more clearly.)

So when I realized that Inner Economist had this strongly Thomist philosophic flavor, I was greatly comforted.

I left this comment for him:

Alex: I agree with you (even though I am a believer). Science rejects everything without evidence; faith accepts critical things without evidence. Both point to the truth when used together; either in an exclusive extreme will act as a truth prophylactic. In that mysterious and controversial book we call the Bible, an author says, "Come now, let us reason together".

UPDATE: Whoops, that was Tyler Cowen, not Alex.

Some global warming updates from GISS

Intrade (or any prediction exchange wanting to compete), please list global warming contracts!

The information will probably end up saving lives, as we can more efficiently allocate finite resources to global warming research and reduction (vs. preventative healthcare, disease control, micro loans, etc.). For instance, we spend a lot of money on the AIDS pandemic in Africa, but polluted water and malaria each claim more victims. The investment allocations could be tweaked, quite a bit.

In today's WSJ, Goddard Institute of Space Studies finds that:

The latest twist in the global warming saga is the revision in data at NASA's Goddard Institute for Space Studies, indicating that the warmest year on record for the U.S. was not 1998, but rather 1934 (by 0.02 of a degree Celsius).

Canadian and amateur climate researcher Stephen McIntyre discovered that NASA made a technical error in standardizing the weather air temperature data post-2000. These temperature mistakes were only for the U.S.; their net effect was to lower the average temperature reading from 2000-2006 by 0.15C.

The new data undermine another frightful talking point from environmentalists, which is that six of the 10 hottest years on record have occurred since 1990. Wrong. NASA now says six of the 10 warmest years were in the 1930s and 1940s, and that was before the bulk of industrial CO2 emissions were released into the atmosphere.

Those are the new facts. What's hard to know is how much, if any, significance to read into them. NASA officials say the revisions are insignificant and should not be "used by [global warming] critics to muddy the debate." NASA scientist Gavin Schmidt notes that, despite the revisions, the period 2002-2006 is still warmer for the U.S. than 1930-1934, and both periods are slightly cooler than 1998-2002.

Still, environmentalists have been making great hay by claiming that recent years, such as 1998, then 2006, were the "warmest" on record. It's also not clear that the 0.15 degree temperature revision is as trivial as NASA insists. Total U.S. warming since 1920 has been about 0.21 degrees Celsius. This means that a 0.15 error for recent years is more than two-thirds the observed temperature increase for the period of warming. NASA counters that most of the measured planetary warming in recent decades has occurred outside the U.S. and that the agency's recent error would have a tiny impact (1/1000th of a degree) on global warming.

If nothing else, the snafu calls into question how much faith to put in climate change models. In the 1990s, virtually all climate models predicted warming from 2000-2010, but the new data confirm that so far there has been no warming trend in this decade for the U.S. Whoops. These simulation models are the basis for many of the forecasts of catastrophic warming by the end of the century that Al Gore and the media repeat time and again. We may soon be basing multi-trillion dollar policy decisions on computer models whose accuracy we already know to be less than stellar.

What's more disturbing is what this incident tells us about the scientific double standard in the global warming debate. If this kind of error were made by climatologists who dare to challenge climate-change orthodoxy, the media and environmentalists would accuse them of manipulating data to distort scientific truth. NASA's blunder only became a news story after Internet bloggers played whistleblower by circulating the new data across the Web.

UPDATE: Co-founder of Greenpeace sets the record straight on forestation, and the myths of DiCaprio's new movie. (via Drudge)

Problems using FedEx for TS checks

I was catching up with Todd in the pit today, and he told me about this. The horror. Be careful out there!

Asante Samuel pays some tuition to Negotiation U

He says to the media:

Happy to be back?

“Happy to be back. I love my team, I love my fans, I’m happy to be back. I’m ready to play some football.”

When did you sign the deal?

“Both sides are happy, we came to an agreement, it worked out fine. Everybody’s happy, that’s what it comes down to.”

Was it the tender, or another one-year deal?

“We worked it out. We’re happy. Both sides are happy.”

Earlier, John Tomase wrote:

Unlike a year ago, when the Pats botched the Deion Branch negotiations and had no one to blame but themselves, this time the missteps belonged to Samuel, who painted himself as little more than a mercenary.
First, Samuel preemptively blasted the team during last year’s playoffs, which made for great copy but demonstrated a keen lack of common sense.
Then he demanded money on par with the eight-year, $80 million contract that top free agent cornerback Nate Clements signed with San Francisco, wanting $30 million in the first three years. The Patriots countered with $13 million in bonuses.
And then the real fun started. Samuel blasted the Pats for not offering what he could receive on the open market.
What he failed to grasp was he wasn’t a true free agent. Any team signing him had to send the Pats two first-round picks.

When defensive end Ty Warren [stats] signed a surprise five-year, $36 million extension earlier this month, he credited keeping the negotiations private as a key to completing the deal.
“It just goes to show that when things are handled behind closed doors, they run smoothly,” Warren said.
So now what?
Samuel needs to produce a reasonable facsimile of last year’s 10 interceptions to land the contract he expects in free agency. But he hasn’t left himself much time to work into game shape and is in danger of getting hurt or not performing up to par, especially during the first month of the season.
They say cornerbacks play on an island. Samuel’s actions over the last few months make that statement doubly true, because he’s basically marooned on one now.

Nice John, except the Pats DID NOT BOTCH Deion Branch negotiations.

2008 Recession Contract trading over 40

A biblical case for the libertarian productivity advantage

A libertarian capitalist and biologist raise this, from the book of Proverbs:

Check out this Econtalk podcast, an interview with ant scientist Deborah Gordon. The theme is how ant colonies are highly organized and productive economies, with the division of labor coordinated across thousands of participants, but with no central leadership or control whatsoever (the so-called "queen" is unique only in that she alone lays eggs).

Gordon begins by quoting the Bible, the famous line from Proverbs about how we should emulate the industriousness of ants: "Go to the ant, you sluggard; consider its ways and be wise!" But she reveals the entire context of this famous line -- it's not the ant's industry alone that is admirable, but just as much his independence and self-determination:

Go to the ant, you sluggard; consider its ways and be wise!

It has no commander, no overseer or ruler, yet it stores its provisions in summer and gathers its food at harvest.

Yup, these are The Sports Guy's readers

Simmons' latest mailbag, which ends with:

I sat four seats over from Tim Robbins at Shea last night. He didn't even acknowledge my drunk brother calling him "Meat" for three innings straight. Not even a response after Alou went deep and he hit him with the obligatory "He hit the … bull! He gets a free steak." If you see him around tell him to stop spreading his commie propaganda and grow a sense of humor. Thanks SG.
--Frank B., New York
SG: Yup … these are my readers.

Cat bond risk

Moneyball's Michael Lewis on catastrophe bond trader John Seo (via Chris Masse). A couple of excerpts:

And if there has been a theme of modern Wall Street, it’s that young men with Ph.D.’s who approach money as science can cause more trouble than a hurricane. John Seo is oddly sympathetic to the complaint. He thinks that much of the academic literature about finance is nonsense, for instance. “These academics couldn’t understand the fact that they couldn’t beat the markets,” he says. “So they just said it was efficient. And, ‘Oh, by the way, here’s a ton of math you don’t understand.’ ” He notes that smart risk-takers with no gift for theory often end up with smart solutions to taking extreme financial risk — answers that often violate the academic theories. (“The markets are usually way ahead of the math.”) He prides himself on his ability to square book smarts with horse sense. As one of his former bosses puts it, “John was known as the man who could price anything, and his pricing felt right to people who didn’t understand his math.”

And after all, how accurate were the models that forecast the likelihood that Enron would collapse? Next to what Wall Street investors tried to predict every day, natural disasters seemed almost stable. “In the financial markets, you have to care what other people think, even if what they think is screwed up,” Seo says. “Crowd dynamics build on each other. But these things — hurricanes, earthquakes — don’t exhibit crowd behavior. There’s a real underlying risk you have to understand. You have to be a value investor.”

In the spring of 2001, to the surprise of his colleagues, Seo left his big Wall Street firm and opened a hedge fund — which, he announced, wouldn’t charge its investors the standard 2 percent of assets and 20 percent of returns but a lower, flat fee. “It was quixotic,” says Paul Puleo, a former executive at Lehman who worked with Seo. “He quits this high-paying job to basically open a business in his garage in a market that doesn’t exist.” Seo named his firm Fermat Capital Management, after one of his intellectual heroes. “I had once read the letters between Pierre de Fermat and Blaise Pascal,” he wrote in a recent e-mail message. “From my father I had learned that most great mathematicians were nasty guys and total jerks (check out Isaac Newton . . . extra nasty guy), but when I read the Fermat-Pascal letters, you could see that Fermat was an exception to the stereotype . . . truly a noble person. I loved his character and found that his way of analyzing profitless games of chance (probability theory) was the key to understanding how to analyze profitable games of chance (investment theory).”

Four years later, Seo’s hedge fund still faced two problems. The smaller one was that investors were occasionally slow to see the appeal of an investment whose first name was catastrophe. As one investor put it, “My boss won’t let me buy bonds that I have to watch the Weather Channel to follow.” That objection doesn’t worry Seo much. “Investors who object to cat-bond investing usually say that it’s just gambling,” he says. “But the more mature guys say: ‘That’s what investing is. But it’s gambling with the odds in your favor.’ ”

US needs WTO, but WTO is pushing against its gambling ban

In the NY Times. The government shoulda just listened to Barney Frank and avoided this mess.

Rollback those gambling restrictions! I'm for prediction markets and exchanges. I don't really care about against mafia-run games, state-run lotteries, casino and racing cartels--but free trade in prediction markets will do a lot to reverse those transgressions.

Conover's "Treasury Boneyard"

Steve demonstrates that 10% of the national debt ($800 billion) is not national debt.

This blog is rated

(thanks to Steve Bainbridge)

I'm glad for the family friendly rating (movies with the same rating outperform). But the world in which we trade spans all the ratings. I'm not sure how close to the world median rating I should be (for a reality blog).

Gary Becker on central bank liquidity activities

In sum, Becker is against rescuing hedge fund managers from the consequences of their decisions, but he is for minimizing the impacts of the liquidity crunch into the general economy.

UPDATE: Arnold Kling is attributing some Fed attribution error by some pundits:

I hate it when pundits claim that the Fed is behind everything that happens in financial markets. I call this the Fed attribution error. In Tamny's case, it is compounded by using the price of gold as an indicator, a practice that I view as the economic equivalent of astrology.

Just as Douglass North sees the world as filled with challenges for establishing property rights and monitoring behavior (challenges that give rise to institutions such as corporations, contracts, standards, etc.), I see the world as filled with challenges for allocating financial risk. People with savings constantly have to be buying securities without knowing exactly the underlying risks.

We absolutely do not live in a Modigliani-Miller world of perfectly transparent financial intermediation. As an insurance company or a venture capitalist, my techniques for evaluating and managing risk are proprietary. The underlying risks that I take are never going to be perfectly transparent to my investors.

What we are seeing in the housing market is not some astrological misalignment of the constellations of interest rates and gold prices. What we are seeing is some innovative risk-assessment and risk-transfer mechanisms that blew up.

Can prediction markets be gamed?

Some people think so. Anyone with more certain information to an outcome could certainly reap profits from counterparties providing liquidity into a prediction market.

But what of the temptation of the self-fulfilling prophecy? For example, someone could buy a terrorist event contract cheaply, and then attempt a terrorist act such that his contracts expire in the money.

Markets require anonymity for greater efficiency (people are known to say one thing but then do another). But insider trading patterns are an audit trail that can lead to the insider traders, so is that enough of a disincentive to check the temptation?

UPDATE: Chris Masse, I wanted to cross post this on MO, and also comment on your recent global warming contract post, but I cannot access the site. Feel free to cross post this if you are able, and my comment was going to be along the lines of "No blogger has honor as a guest blogger" or something like that.