A FRIEND OF THE PREDICTION MARKETS IN THE WHITE HOUSE

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Under the Barack Obama administration, Cass Sunstein will head the Office of Information and Regulatory Affairs, within the Office of Management and Budget, which is part of the Executive Office of the President of the United States.

Here&#8217-s Cass Sunstein&#8217-s track record on prediction markets:

– Infotopia: How Many Minds Produce Knowledge (Oxford University Press 2006)&#8230- which featured prediction markets and collective intelligence. – (podcast)

– Deliberating groups versus prediction markets – (paper)

– A blog post defending the prediction markets after the New Hampshire upset.

– Cass Sunstein so-signed the 2008 petition on prediction markets.

UPDATE:

– Chicago Tribune

– WashPost

– Wall Street Journal

Although obscure, the post wields outsize power. It oversees regulations throughout the government, from the Environmental Protection Agency to the Occupational Safety and Health Administration. Obama aides have said the job will be crucial as the new administration overhauls financial-services regulations, attempts to pass universal health care and tries to forge a new approach to controlling emissions of greenhouse gases.

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UPDATE: PodCast on behaviorial economics

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UPDATE: Cass Sunstein and Bo Cowgill – PDF file

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NEXT: Part Three

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A FRIEND OF THE PREDICTION MARKETS IN THE WHITE HOUSE – Part 2

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Previously: Part One

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Wall Street Journal:

Although obscure, the post wields outsize power. It oversees regulations throughout the government, from the Environmental Protection Agency to the Occupational Safety and Health Administration. Obama aides have said the job will be crucial as the new administration overhauls financial-services regulations, attempts to pass universal health care and tries to forge a new approach to controlling emissions of greenhouse gases.

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NEXT: Part Three

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Are they afraid?

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Bo Cowgill and Midas Oracle are the only media to have published about the Lee&#8211-Moretti paper. We are awaiting insightful takes from the following prediction market bloggers:

– Freakonomics @ New York Times

– Overcoming Bias – (&#8221-the future of humanity&#8221-)

– Odd Head

– Computational Complexity

– Caveat Bettor

– Mike Linksvayer Blog

– NewsFutures Blog

– Inkling Markets Blog

– Consensus Point Blog

– Xpree Blog

– George Tziralis Blog

– Chris Hibbert Blog

– Jason Ruspini Blog

– John Delaney Blog

– James Surowiecki Blog @ New Yorker

– Felix Salmon @ Portfolio – Market Movers

– Zubin Jelveh @ Portfolio – Odd Numbers

If you are a reader of one of the blogs listed above, do e-mail their owners to demand that they feature a piece on the Lee&#8211-Moretti paper.

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Learning in Investment Decisions: Evidence from Prediction Markets and Polls – (PDF file) – David S. Lee and Enrico Moretti – 2008-12-XX

In this paper, we explore how polls and prediction markets interact in the context of the 2008 U.S. Presidential election. We begin by presenting some evidence on the relative predictive power of polls and prediction markers. If almost all of the information that is relevant for predicting electoral outcomes is not captured in polling, then there is little reason to believe that prediction market prices should co-move with contemporaneous polling. If, at the other extreme, there is no useful information beyond what is already summarized by the current polls, then market prices should react to new polling information in a particular way. Using both a random walk and a simple autoregressive model, we find that the latter view appears more consistent with the data. Rather than anticipating significant changes in voter sentiment, the market price appears to be reacting to the release of the polling information.

We then outline and test a more formal model of investor learning. In the model, investors have a prior on the probability of victory of each candidate, and in each period they update this probability after receiving a noisy signal in the form of a poll. This Bayesian model indicates that the market price should be a function of the prior and each of the available signals, with weights reflecting their relative precision. It also indicates that more precise polls (i.e. polls with larger sample size) and earlier polls should have more effect on market prices, everything else constant. The empirical evidence is generally, although not completely, supportive of the predictions of the Bayesian model.

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polls-prediction-markets

Prediction markets react to polls.

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Learning in Investment Decisions: Evidence from Prediction Markets and Polls – (PDF file) – David S. Lee and Enrico Moretti – 2008-12-XX

In this paper, we explore how polls and prediction markets interact in the context of the 2008 U.S. Presidential election. We begin by presenting some evidence on the relative predictive power of polls and prediction markers. If almost all of the information that is relevant for predicting electoral outcomes is not captured in polling, then there is little reason to believe that prediction market prices should co-move with contemporaneous polling. If, at the other extreme, there is no useful information beyond what is already summarized by the current polls, then market prices should react to new polling information in a particular way. Using both a random walk and a simple autoregressive model, we find that the latter view appears more consistent with the data. Rather than anticipating significant changes in voter sentiment, the market price appears to be reacting to the release of the polling information.

We then outline and test a more formal model of investor learning. In the model, investors have a prior on the probability of victory of each candidate, and in each period they update this probability after receiving a noisy signal in the form of a poll. This Bayesian model indicates that the market price should be a function of the prior and each of the available signals, with weights reflecting their relative precision. It also indicates that more precise polls (i.e. polls with larger sample size) and earlier polls should have more effect on market prices, everything else constant. The empirical evidence is generally, although not completely, supportive of the predictions of the Bayesian model.

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polls-prediction-markets

WordPress 2.7, the embedded YouTube videos, and the feed readers

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This is an update. The WordPress guy came back to me with answers. It is a dual problem: a HTML validity issue and an invalid tag issue in TinyMCE.

  1. One way to solve the problem would be to use the &#8220-Smart YouTube&#8221- plugin. I won&#8217-t.
  2. If I embed the YouTube video in the &#8220-HTML&#8221- area, and don&#8217-t click on &#8220-Visual&#8221- before publishing, all is fine &#8212-the YouTube video will end up in the feed reader. I&#8217-ll do that, now.

The year 2008 in pictures -thanks to the Beeb

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In the US, a believer in Big Government and Nanny State swept away the neo-con cockroaches from the White House (good riddance):

change

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In the UK, a conservative bozo (Boris Johnson) took over the City of London:

boris

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The world&#8217-s financial markets experienced a melting debacle:

crisis

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And I won&#8217-t mention Bernard Madoff &#8212-the nightmare that keeps on giving.

Merry Christmas, Happy Hannukah, and Happy Festivus&#8230- anyway.

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The Open Institute Of Prediction Markets

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I am (finally) finished writing up the mission statement of The Open Institute Of Prediction Markets.

I have asked Mike Giberson, Mike Linksvayer, and (of course) David Pennock, to give me feedback, so I can see whether I am on the right track or not. If it&#8217-s the case, and once I have integrated their feedback, I will show it to 3 other prediction market luminaries, and so forth, until an ethereal sense of perfection emerges out of it. (Could take weeks.)

Stay tuned.

PS: Google is forbidden to snatch that &#8220-mission&#8221- webpage, don&#8217-t ever think of trying to read the cached webpage.

UPDATE: Got feedback. Need to work on it.

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CFTC-regulated, thinly-traded, all-electronic derivative exchange USFE puts itself for sale.

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USFE&#8217-s press release:

U. S. Futures Exchange Evaluating Strategic Alternatives
Sale of Exchange Sought by Year-End

CHICAGO, December 17, 2008 – The board of directors of the U.S. Futures Exchange (USFE), over the last several weeks, has actively sought a strategic sale of its operations, with the goal of reaching a resolution by December 31, 2008.

“We are currently in the process of seeking a strategic investor who can leverage the vision of the USFE market model,” said Bernard W. Dan, chairman, USFE. “As this process moves forward, the marketplace can count on the continued professionalism of the USFE employees who have led a bold vision to pioneer new futures products.”

The board of directors of USFE is made up of 3 independent directors as well as representatives of its three principal shareholders MF Global Ltd., Man Group plc, and U.S. Exchange Holdings, Inc. USFE was formed in 2006 through a capital investment by Man Group plc.

About U.S. Futures Exchange
Chicago-based U.S. Futures Exchange offers specialized products to meet the unique market demands of retail, hedge fund and institutional customers in a fully-regulated, centrally-cleared futures and options exchange. U.S. Futures Exchange was formed in 2006, following a capital investment from Man Group. For further information, visit www.usfe.com.

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More info: Reuters

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