Greg Mankiw doesn’t agree with the InTrade prediction markets on the future tax rates.

Posted on November 2, 2008 by Chris F. Masse

“This surprises me.”

The Jason Ruspini prediction markets (the “tax futures”).

About Chris F. Masse

Founder and President of Midas Oracle
This entry was posted in Exchanges & Markets, Market Prices & Probabilities, Politics and tagged , , , , , . Bookmark the permalink.

16 Responses to Greg Mankiw doesn’t agree with the InTrade prediction markets on the future tax rates.

  1. Adam Gurri says:
    November 2, 2008 at 9:20 PM

    Personally I find his idea about tax hedging to be very, very interesting.  I think as a suggestion of why the markets might be inaccurate it is entirely erroneous, but as a potential activity in itself it is a fascinating idea.

    I don’t know if anyone’s doing this now, but it would be a brilliant way to offset one’s losses from a tax increase by essentially providing an information service–helping people figure out when their taxes are going to change.

  2. Chris F. Masse says:
    November 3, 2008 at 3:37 AM

    1. Why do you think that the markets are off (if any), then?
    2. I don’t think that someone is hedging that way.

  3. Chris F. Masse says:
    November 3, 2008 at 3:38 AM

    Fill in your profile with the link to your blog.
    Get yourself a Gravatar.
    http://www.midasoracle.org/authors/how-to-comment/

  5. Adam Gurri says:
    November 3, 2008 at 8:21 AM

    I don’t think anyone is actually hedging that way, either.   Still, it’s an interesting idea, isn’t it?  I think prediction market shares should become a normal part of people’s investment portfolio.

  7. Mike Linksvayer says:
    November 3, 2008 at 10:01 AM

    If there’s any hedging going on, it’s purely symbolic — see reported trading volumes — below 100 trades for all but one of these contracts.

  8. Adam Gurri says:
    November 3, 2008 at 10:17 AM

    Mike: yeah, I figured that was probably the case.  I very much doubted that anyone was actually hedging, I think think that the possibility of it is an innovative insight in itself.

  9. Chris F. Masse says:
    November 3, 2008 at 10:40 AM

    Adam, what does your gravatar mean? Is it Chinese or Japanese?

  10. Adam Gurri says:
    November 3, 2008 at 10:42 AM

    Chinese, and it just means “dog” (nothing fancy).  Kind of looks like one, too, doesn’t it?

  11. Chris F. Masse says:
    November 3, 2008 at 10:56 AM

    It is a cool ideogram. (That’s how they are called, right, “ideograms”?)
    http://en.wikipedia.org/wiki/Ideogram

  12. Adam Gurri says:
    November 3, 2008 at 10:59 AM

    Thanks!

    By the way, for some reason Google Chrome does not seem to like it when I comment here.  The comments go through, but then they kill the tab afterwards for some reason.

    Just FYI; pretty sure that’s not going to affect like…all but a tenth of a tenth of a percent of your viewers :)

  13. Barry0 says:
    November 3, 2008 at 11:42 AM

    Those rich enough to be affected will probably have something sorted out already, perks. Those too poor will not really notice. All that`s left are  middle earners who probably wont have a Job by 2009 :-)

  14. Chris F. Masse says:
    November 3, 2008 at 1:11 PM

    Adam Gurri, this bug should be reported either to Google or to WordPress. I’m clueless. Do use FireFox.

  15. Jason Ruspini says:
    November 3, 2008 at 8:12 PM

    I agree that the 2009 prices seem high. One of the tax policy centers put out a release stating matter-of-factly that the top marginal rate would rise for 2009 if Obama is elected.  That may have been an overstatement as a function of the center’s politics, and maybe that’s what the Intrade buyers are relying on.  If the prices are in fact “bad” though, someone could go long Obama and sell them down.  Since the 2009 contracts are already at 80%, I wouldn’t be surprised to see “sell on the news” action over the next week.

    http://www.intrade.com/jsp/intrade/trading/t_index.jsp?selConID=575696

  16. Jason Ruspini says:
    November 6, 2008 at 7:21 PM

    Re: “sell on the news”, this is happening as I hoped it would.  It looks like the election settlement created a lot of free funds that have migrated to the tax market.

    It seems like the prices weren’t efficient for the past two weeks, but much more liquid markets had similar moves leading up to the election.  Look at the chart for First Solar (FSLR), the classic Obama stock. It looks a lot like the 2009 >36% tax contract over the past two weeks.

    This means that volume is not always a good indication of price efficiency.  If the market has the “right” price, there is little incentive to trade, especially if the settlement is far off, right?  If the market price diverges from mean beliefs because of a large marginal trader or an automatic market maker that is not responding to indicators it clearly should, there is a lot of incentive to trade and put up volume, but those prices were actually more erroneous.

Leave a Reply