Markets are impressive mechanisms for information aggregation but they’re not magic. The information has to come from somewhere, and markets are inherently always living in the phase transition between stability and instability. (It is the stability that makes prices informative and the instability that allows the market to be liquid.)

I don’t see a huge problem with what Nate did either (especially since he added the caveat that he disagreed with some of the imputed beliefs). My point was just that there a lot more interesting information in the order book beyond the price at last trade. This can be used to derive a belief distribution and not just a point estimate. Regarding the interpretation of the current price, I should have said that this tells us nothing about the beliefs of traders who are not party to this transaction beyond the information in the order book. The broader point was that one needs to allow for heterogeneous priors (not just heterogeneous information) and make some assumptions about risk-preferences in order to interpret the data. Manski does indeed make some of these points, thanks for the link. But most modeling in economics is still based on the common prior assumption and confronting this was also part of the point of the post.

If you have varying account sizes, you know right away the price isn’t an evenly weighted average of beliefs, but I don’t see a huge problem with what Nate Silver wrote given his purposes. He just said they were proportional. Is someone claiming that market prices are *inversely* proportional to traders’ perceptions? Otherwise, this specific point borders on pedantry even if the broader point that market structure frustrates any interpretations of price is correct. Also I don’t really agree with the statement that the current price “tells us nothing about the beliefs of traders who are not party to this transaction.” Presumably if the other traders thought the last price was horribly off, they would move it. I agree that you can’t infer much about beliefs from the orders that are away from the market because often that is just posturing.

Some of this was addressed in what was probably the first skeptical PM paper per se, and subsequent discussion:
http://www.aeaweb.org/annual_mtg_papers/2006/0106_1015_0703.pdf

In summary, “momentum” can exist, but the places where you’ll see it is in races where current public opinion is out of step with best predictions. The mere information that a race has a 5-point swing is not enough to predict a future shift in that direction. As Nate emphasizes, such a prediction is only appropriate in the context of real-world information, hypotheses of “factors above and beyond the direction in which the polls have moved in the past.”

- As an appendix, and on another topic, compare Justin Wolfers’s naive view on genders with Steve Blank’s informed viewpoint.

Don’t Create Standards You Will Find Hard to Maintain Yourself.

Be Honest.

Understand That There’s Much More to Being a Good Pollster.

Appreciate Innovation.

Do Some Polling.

Nate Silver responds.

UPDATE: Prof Andrew Gelman’s take.

Jason Ruspini:

The piece is problematic insofar as it underweights proximity to areas where people work, which results in high ratings for distant neighborhoods and low ratings for central ones, on top of the effect of higher rents in central neighborhoods. True, if you work from home, it might make more sense to live in the outer boroughs. But if you have a one hour + commute every day, it doesn’t really help that you happen to live near a subway stop and thus have a relatively high “transit” rating.

For the restaurant category, he seems to be considering quantity but not quality. How else does Long Island City have a higher rating than Gramercy/Flatiron, where 9 of the top 50 Zagats restaurants are located? I don’t even think that Long Island City beats Gramercy/Flatiron in terms of quantity either.

Ultimately, of course, preferences are too subjective to give one ordinal ranking, but the distance-to-average-work-location issue seems glaring, and increases the outer borough bias.

In part #2, he speaks about the books he is writing: