Andy Mukherjee:

[...] Finally, demand estimation is too important to be left entirely to experts.

Companies such as Google Inc. are harnessing the power of prediction markets — which gather information from a large number of participants — to generate useful forecasts.

There’s no reason why governments can’t do the same.

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Great idea.

Let’s shame the 95% of Fortune-500 companies for not using enterprise prediction markets.

• Shame on you, McDonald’s, for not using enterprise prediction markets.
• Shame on you, Nike, for not using enterprise prediction markets.
• Shame on you, Conquest Capital, for not using enterprise prediction markets.
• etc. etc. etc.

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Good news: They have a new columnist who tries to apply the prediction market approach. He even uses my two favorites tags, “prediction markets” and “prediction exchanges“. Good —although, the last one should be singular, not plural, in this context. (The “betting exchange” tag is discarded. Not smart.)

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Bad news:

#1. The writer hides behind a pseudonym, “The Predictor”. I don’t think it’s a good idea. With all the crap on the Web, readers are looking for serious articles from known experts. Of all 122 feeds I read daily, only one is published by an anonymous blogger —and that’s a small blog. And I can’t think of any serious, popular blog edited by someone who hides behind a pseudonym. People want to know who wrote what. They want to be able to check the bloggers’ background and disclosure.

[And "The Probabilist" would have been a better pseudonym, anyway. ]

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#2. The author profile does not convey an image of professionalism:

The Predictor sits in a darkened room 20 hours a day, eats cheese and rice cakes, drinks only low fat lime soda, wears glasses, has long hair, and, above all else, is Betfair’s man on everything prediction markets. He is going to take us through the highs and lows of prediction markets past, present and even future. Be sure to keep an eye out for a fascinating insight into prediction markets and exchanges, what they can do, what they have done and why this can be useful to you.

Is this BetFair man educated in the fields of statistics, probabilities and economics? Has he a long experience in applying the prediction market approach? Is he an experienced prediction market blogger? That would be more interesting to know than to hear that their writer “eats cheese” and “has long hair”.

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#3. The clueless BetFair blog writer resorts to magic to explain historical pricing:

The polls themselves are often a key source of information that move the markets around, but on this occasion the markets were moving in direct opposition to what polling information was telling punters. The 8,000+ people trading on the market were getting it right to the most frightening accuracy.

This is a typical misunderstanding of how prediction markets work. Any trade is in fact informed/misinformed by either passion or some advanced indicator(s). In a cheap prediction market event study like this one, the writer (here, a British stringer working one ocean away from the topic at hand) suppresses evidence of how some advanced indicator(s) (e.g., some leaked polls) impacted trading, and declares that the BetFair magic was at work. That’s not journalism —that’s charlatanism. It’s mediocre. If the prices moved, it’s necessarily that some information hit the US wires. The fact that this British pseudo-journalist did not discover it does not mean that any hint didn’t exist. The prediction markets are simply information aggregation mechanisms (IAMs) —intelligence in, intelligence out; garbage in; garbage out. BetFair does help traders reverse their psychological arrow of time —remembering the future instead of the past. There’s no magic in prediction markets. There is causality —the prediction market journalist should discover it.

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TAKEAWAY: As a popular blogger who loves to link out to other resources on prediction markets, I regret to say that I won’t read this BetFair crap anymore and won’t link to it in the future. I bet that the serious people genuinely interested in prediction markets will find other blogs to satisfy their legitimate curiosity about James Surowiecki’s wisdom of crowds.

How come BetFair, which is a serious, legal and ethical prediction exchange, powered by so many great people in Hammersmith, can go so low? It’s unbelievable. There is a striking dichotomy between the excellence of their information technology team and the crassiness of the people who speak out for them.

Hillary [Clinton] did not show good judgment in her areas of influence — the legal fiefdom, health care and running oppo-campaigns against Bill’s galpals.

“She hasn’t accomplished anything on her own since getting admitted to Yale Law,” wrote Joan Di Cola, a Boston lawyer, in a letter to The Wall Street Journal [*] this week, adding: “She isn’t Dianne Feinstein, who spent years as mayor of San Francisco before becoming a senator, or Nancy Pelosi, who became Madam Speaker on the strength of her political abilities. All Hillary is, is Mrs. Clinton. She became a partner at the Rose Law Firm because of that, senator of New York because of that, and (heaven help us) she could become president because of that.”

[*] I couldn’t get the damn link.

Previously: Will Hillary Clinton win the 2008 US presidential elections?

Free version here, via George Tziralis.

Nowhere does Roger Cohen talk about the information aggregation mechanisms and compare them. Useless prose. Give us more of Steve Levitt instead.

“Some men have been found to denounce and deride the modern system – what they call the capitalist system. The modern system is based on liberty, on contract, and on private property.” (1883)

Compare Sumner’s description of key elements with that from Elhanan Helpman’s recent survey The Mystery of Economic Growth, which, after 141 pages discussing the current state of academic debate on economic development, concludes

“Although it has been established that property rights institutions, the rule of law, and constraints on the executive are important for growth, the exact ways in which they effect income per capita are not well understood.”

Cautiously, hesitantly, after a hundred and twenty years during which academic opinion almost unanimously rejected “the modern system . . . based on liberty, on contract, and on private property,” we have come full circle. Had Sumner’s institutional insights been considered expert opinion throughout this period and successfully implemented in nations around the world, poverty could have been eliminated long ago; imagine what a different world we would be living in if our universities had churned out generation after generation of Sir John Cowperthwaites, of all nationalities, each of whom advocated persistently for classical liberal economic policies in government, journalism, teaching, research, etc.

Even Helpman, however, doesn’t cite the correlations between increased economic freedom (as measured by the Fraser Index) and increased rates of economic growth. Worse yet, Jeffrey Sachs, Director of the UN Millennium Project, Scientific American columnist, and probably the most influential economist on the planet, explicitly denies that economic freedom has any relationship to economic growth. His NYT best seller, The End of Poverty, points out that economic growth is not correlated with the level of economic freedom, and then moves on without further discussion. Given the evidence that increased economic freedom, rather than level of economic freedom, is the salient variable, it is mysterious why he ignores this evidence.

Meanwhile, there are investment funds that explicitly focus on economic freedom indices, and successful investors have acknowledged similar principles throughout this period.

How can we improve the dissemination of valuable perspectives on how to alleviate poverty? Clearly the academic reputation system has not been an efficient mechanism for discovering and disseminating this information.

Reputational bets, such as the famous Ehrlich-Simon bet on resource scarcity, are a start. I’ve proposed a reputational bet between Jeffrey Sachs and Bill Easterly in which we compare, twenty years from now, the twenty nations with the largest gains in economic freedom with the twenty nations that have received the most foreign aid, excluding those in both categories, and see which collection experiences the largest average increase in per capita income. Sachs would refuse such a bet, knowing that he would lose, and would thereby be forced to acknowledge that institutions generally, and those that promote economic freedom in particular, do, in fact, have important implications for economic growth. He could no longer blithely mislead global institutions, political leaders, NGOs, the scientific community, and the public.

But tying academic reputation to predictive ability more broadly would have more profound repercussions for knowledge dissemination and reputation. We need to acknowledge the utter failure of academia, outside the hard sciences, as an efficient system for knowledge generation and dissemination (What exactly are the net social returns on our 120 year investment in academic sociology?). Prediction markets, success in which is tied to academic reputation in relevant fields, would profoundly change the process through which we identified and disseminated socially-validated expertise.

The Least I Owe You
By Jim Cramer
RealMoney.com Columnist
3/22/2007 6:29 AM EDT

You may have seen some articles the past several days attacking me about an interview I gave recently where I discussed the kinds of manipulative trading practices that go on every day in the investing community. Let me say this: No one knows and respects the securities laws more than I do. (I didn’t go to Harvard Law School for nothing!)

When I was a hedge fund trader in the 1990s, I played fair, and I did nothing that violated those laws. But others did not play fair, and that’s why I started TheStreet.com and have been writing about these abuses for nearly a decade — to explain to my readers how the markets really work. I wanted to give transparency to the market and tell people the good and the bad.

Some professional traders don’t like it when I expose how their game is played, and some of the TheStreet.com‘s competitors don’t like it when people are interested in what I have to say. But I am going to continue to write and talk about how the markets really work — in my own sometimes hyperbolic and tongue-in-cheek style — and call them as I see them. That’s the least I owe you.

Jim Cramer’s video, which aired Dec. 22, 2006, on TheStreet.com TV.

Transcript (by Slate):

Verbatim transcript (partial) of Jim Cramer on Wall Street Confidential, Dec. 22, 2006:

You know, a lot of times when I was short at my hedge fund—when I was positioned short, meaning I needed it down—I would create a level of activity beforehand that could drive the futures. It doesn’t take much money. Similarly, if I were long, and I wanted to make things a little bit rosy, I would go in and take a bunch of stocks and make sure that they’re higher. Maybe commit $5 million in capital, and I could affect it. What you’re seeing now is maybe it’s probably a bigger market. Maybe you need $10 million in capital to knock the stuff down.
But it’s a fun game, and it’s a lucrative game. You can move it up and then fade it—that often creates a very negative feel. So let’s say you take a longer term view intraday, and you say, “Listen, I’m going to boost the futures, and the when the real sellers come in—the real market comes in—they’re going to knock it down and that’s going to create a negative view.” That’s a strategy very worth doing when you’re valuing on a day-to-day basis. I would encourage anyone who’s in the hedge fund game to do it. Because it’s legal. And it is a very quick way to make money. And very satisfying.
By the way, no one else in the world would ever admit that. But I don’t care. And I’m not going to say it on TV.

In the next section of the interview, Cramer is discussing what hedge funds that are struggling do to improve their performance before the end of the year.

It’s really vital these next six days because of your payday, you’ve really got to control the market. You can’t let it lift. When you get a Research in Motion, it’s really important to use a lot of your firepower to knock that down, because it’s the fulcrum of the market today. So, let’s say I were short. What I would do is I would hit a lot of guys with RIMM.
Now, you can’t “foment.” That’s a violation. You can’t create yourself an impression that a stock’s down. But you do it anyway, because the SEC doesn’t understand it. That’s the only sense that I would say this is illegal. But a hedge fund that’s not up a lot really has to do a lot now to save itself.
This is different from what I was talking about at the beginning where I was talking about buying the QQQs and stuff. This is actually blatantly illegal. But when you have six days and your company may be in doubt because you’re down, I think it’s really important to foment—if I were one of these guys—foment an impression that Research in Motion isn’t any good. Because Research in Motion is the key today.

Cramer goes on to talk about the actual mechanics of what one would do to knock Research in Motion down. Then he continues:

What I used to do was called— If I wanted it to go higher, I would take and bid, take and bid, take and bid, and if I wanted it to go lower, I’d hit and offer, hit and offer, hit and offer. And I could get a stock like RIM for maybe—that might cost me $15 to $20 million to knock RIM down—but it would be fabulous, because it would beleaguer all the moron longs who are also keying on Research in Motion.
So we’re seeing that. Again, when your company is in survival mode, it’s really important to defeat Research in Motion, and get the [CNBC Bob] Pisanis of the world and people talking about it as if there’s something wrong with RIM. Then you would call the [Wall Street] Journal and you would get the bozo reporter on Research in Motion, and you would feed that Palm’s got a killer that it’s going to give away. These are all the things you must do on a day like today, and if you’re not doing it, maybe you shouldn’t be in the game.

Cramer talks for a while in considerable detail about how, if he were short Apple’s stock today, he would knock Apple’s stock down. Then he says:

What’s important when you’re in that hedge-fund mode is to not do anything remotely truthful. Because the truth is so against your view that it’s important to create a new truth to develop a fiction.

A minute later, when talking about how company fundamentals don’t matter, Cramer says:

The great thing about the market is it has nothing to do with the actual stocks. Now, maybe two weeks from now, the buyers will come to their senses and realize that everything that they heard was a lie, but then again, Fannie Mae lied about their earnings for $6 billion, so there’s just fiction and fiction and fiction.
I think it’s important for people to recognize that the way that the market really works is to have that nexus of: Hit the brokerage houses with a series of orders that can push it down, then leak it to the press, and then get it on CNBC—that’s also very important. And then you have a kind of a vicious cycle down. It’s a pretty good game. It can pay for a percentage or two.

Previous: THOU SHALL NOT MANIPULATE. + Jim Cramer’s Manipulating Futures 101

Joe Klein is just the latest of the so-called “MSN” pundits caught red-handed by the political bloggers. Scientist (and leftist blogger) Sean Caroll gives you all the details of the spat between Joe Klein and the bloggers.

Joe Klein is also the author of Primary Colors, the book and the movie (with John Travolta as Bill Clinton). I watched the movie many times. Great stuff.

After the publication of the book (Primary Colors), Joe Klein was fired from NewsWeek and CBS News Sunday (as a political editorialist) for lying to other journalists (in particular to Dan Rather) about being the author of the book —which was first published under the “Anonymous” label.

A pity we can’t turn this Klein-vs-bloggers spat into an event derivative (for lack of clearly defined observables used for contract expiry). It would be fun!