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#1. Yes, the measure of the usefulness of an idea or theory is the number and the quality of web links it receives.

- Google PageRank (the engine powering the world’s #1 media) organizes the world’s information according to how many links go to one source of information, and how high the social status of those links are.

- A quality document posted on the Web is always linked to —if it is not, it is not a quality document. Period.

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#2. The prediction markets should be useful to the experts [*] —otherwise, they are useless and should be terminated (as a forecasting tool).

- The lovers of the prediction markets represent a little coterie of hyper-excited economists, free-market columnists, and opportunistic bloggers.

- The high traffic to the InTrade prediction exchange website is generated out of curiosity. This is the result of the free publicity performed by researchers who live off the trading data handed out by the InTrade executives —it’s a symbiosis (“you pump up my exchange in the media; I help your academic career”).

- For the happy few who understand the mechanism of information aggregation, the prediction markets are a tool of convenience: they get all the week’s politics summed up in a number —that spare them the need to read the newspapers. The problem with that behavior is that when there is an upset, those people don’t understand why the prediction markets failed, because they didn’t pay attention to the primary indicators.

- I am aware of the vapors of some dreamers, but the fact is the polls are still the main forecasting tool in politics —and the main primary indicator of the event derivative traders. (Snake eats itself.) It’s going to stay that way, I forecast.

- In an ideal world, the prediction market scholars should be able to point to situations where some prediction markets were very useful to society and to some other situations where the prediction markets were not useful at all. We need a hierarchy of the prediction markets —based on their usefulness.

- Where are the evidence that our prediction markets provide decisive help to the experts?

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[*] “the experts” = all the experts but the prediction market experts (who are expert in nothing else than pumping up the prediction markets).

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APPENDIX

Robin Hanson:

[I]nfo value [] is the added accuracy the markets provide relative to other mechanisms, times the value of accuracy in improved decisions, minus the cost of maintaining the markets, relative to the cost of other mechanisms. A highly accurate market has little value if other mechanisms can provide similar accuracy at a lower cost, or if few substantial decisions are influenced by accurate forecasts on its topic.

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Prediction markets can yield valuable insight into the dynamics of political campaigns, a conclusion we’ve drawn from years of intensive study and research. We’ve even proselytized about the value of these markets, extolling their ability to yield sharper insights than pundits or polls. [...]

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If this statement were true,

1. Justin Wolfers’ columns at the WSJ would have been linked to by the blogging political experts. They never were.
2. The blogging political experts would have adopted the prediction market tool (over than just quoting the InTrade prices out of curiosity). They never did.

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Both the mystification of the prediction markets (mudding the primary indicators into commentary; suggesting that the traders’ anticipations are always sound) and their demystification (listing the primary indicators) don’t do the trick: Economic science should be able to tell us whether the prediction markets on 2008 US elections are of high social utility, and whether other kinds of prediction markets are of higher social utility. I am not satisfied by what I have been reading, as of today. The prediction markets are rather a tool of curiosity, as of today, not much a tool of forecasting. The prediction markets are not used as a tool by the experts —by “the experts”, I mean all the experts but the prediction market experts (who are expert in nothing else than pumping up the prediction markets): the political experts, the financial experts, the management experts, the oil production experts, the credit experts, the health care system experts, the automobile market experts, the wine market experts, the web technology business experts, the web advertising experts, the medical drug experts, the foreign affairs experts, the military experts, the aviation industry experts, the condom industry experts, the restaurant industry experts, etc.

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APPENDIX

Robin Hanson:

[I]nfo value [] is the added accuracy the markets provide relative to other mechanisms, times the value of accuracy in improved decisions, minus the cost of maintaining the markets, relative to the cost of other mechanisms. A highly accurate market has little value if other mechanisms can provide similar accuracy at a lower cost, or if few substantial decisions are influenced by accurate forecasts on its topic.

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PREVIOUSLY: See Robin Hanson’s take on Google’s enterprise prediction markets.

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