Who would you back, the market consensus or a book-writing pundit?

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'Bad Money' by Kevin Phillips

Tyler Cowen picks the market consensus over book-writing pundits:

Either the current market estimate of inflation is the best estimate available, or you know that it is wrong and you will be a very rich man. I find the former scenario more plausible.

Cowen is commenting on the Kevin Phillips book, Bad Money, recently out.

Of course book authors may be wary of going directly into the financial markets to wager their hard earned cash, which is why I have advocated prediction markets for pundits in which authors would have a chance to back their book-selling punditry with real money.

In Separating cheap talk from truly held beliefs, I wrote of political pundits with books:

Maybe they believe what they write, and would be willing to subsidize a prediction market out of their book royalties to demonstrate the strength of their convictions. Or how about the books from the current crop of U.S. presidential candidates—I wonder if these books contain any claims that are specific and substantive enough to be either true or false.

If such punditry-based prediction markets were common, mistaken-but-honest demagogues (those pundits who actually believe what they write, and are willing to stand behind it) would end up subsidizing more thoughtful analysts participating in the markets- correct honest demagogues would end up taking home larger financial rewards- and dishonest demagogues would dissemble, seek to avoid being pinned down on specific claims, and when pressed for actionable claims they would run and hide.

[Cross posted from Knowledge Problem]

9 thoughts on “Who would you back, the market consensus or a book-writing pundit?

  1. John Salvatier said:

    You mention subsidized prediction markets. Do you know of any papers which investigate how well different subsidization schemes work? I read Predictocracy, which discussed subsidized markets a good deal, but I did not see any references to such papers.

  2. Prediction markets can be directly subsidized with a market maker, allowing all traders who provide info to improve the price to expect to profit. Also, the more fools the more informed traders should be attracted to profit from them, so the mix is endoge said:

    […] See also that question for Mike “Barbecue” Giberson. […]

  3. Michael Giberson said:

    I haven’t seen any studies of how well different subsidies work.  The market scoring rule-based automated market makers are a prominent class of subsidized prediction market. (See Robin Hanson’s article “Combinatorial Information Market Design” if you haven’t already.)  Abramowicz proposes a variety of ideas, but I haven’t seen any systematic comparisons of different types of MSR and their are other forms of subsidized market makers that could be looked at as well.


  4. Jason Ruspini said:

    One thing to keep in mind is that subsidizing need not be coupled with market-making.  Simply being paid interest on your deposit/collateral as with futures would be a huge step for prediction markets.  This will happen along with legalization and regulation (and therefore competition).

  5. Chris F. Masse said:

    @Jason Ruspini: I don’t think there is great competition between real-money prediction exchanges. A de facto monopoly forms itself (InTrade-TradeSports in the US, BetFair in the UK).)

  6. Jason Ruspini said:

    Really the question is why prediction markets have not caught on where they are legal.  Why isn’t there a non-US-facing prediction market exchange like Intrade?  (Meaning one with a focus on innovative non-sports and non-duplicative financial contracts)  This suggests that PM enthusiasts might overestimate the demand for such innovative contracts.

  7. Chris F. Masse said:

    @Jason Ruspini: That is true. And this is why BetFair is not into socially valuable prediction markets. However, what does John Delaney at InTrade is priceless for free-market people who like prediction markets. And it gets inTrade all the good Press, which is priceless too. So InTrade gets ROI in the form of free publicity.

  8. Chris F. Masse said:

    @Jason Ruspini: “non-duplicative financial contracts”. What’s that in plain English? :-D

  9. Jason Ruspini said:

    Contracts that do not duplicate or settle on an existing regulated future/stock/index. All of the financial contracts on Tradefair are duplicative and exist mainly to provide leverage to small-account traders, who should ask themselves whether they might be as well off betting on coin flips.

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