California Institute of Technology economist Charles Plott:
What you’-re doing is collecting bits and pieces of information and aggregating it so we can watch it and understand what people know. People picked this up and called it the ‘-wisdom of crowds’- and other things, but a lot of that is just hype.
The Rise of Crowdsourcing: Creative Wisdom of the Crowd – @ Stanford Business School, Stanford University, California, U.S.A. – 2008-05-20
–->- Predictify &- Cambrian House
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Via Daniel Horowitz (Business and Technology Consultant)
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The Brain has a comment on Scott Page’-s presentation [PPT file] about his book, The Difference:
One question is whether there is a way to usefully systematize that principle by trader selection or via something other than a strict market such as an (incentivised) weighted average system like HP’s BRAIN. The latter type of system will work better in some domains but in general might be less robust because it constantly runs the danger of being overfit to past trader correlations (or apparent expertise, risk appetites, etc). In general, trader self-selection and self-weighting might be more accurate. If you have some metric of “fundamental” trader similarity like proximity, org chart relations, demographic data – as opposed to past trading correlations only, that might work better in terms of expert-selection/expert-weighting.
Previous blog posts by Chris F. Masse:
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Via Emile Servan-Schreiber (who claims it’-s the supportive evidence for The Wisdom Of Crowds)
Has somebody read that book?
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Previous blog posts by Chris F. Masse:
Good news this week for French-speaking Midas Oracle readers: The French version of Surowiecki’-s book has at last been released. Here’-s wishing it the success it deserves! Early reviews are very positive: One reviewer writes poetically about “-crowds so wise that they become revolutionary.”- Cute, and telling: As the country celebrates the student uprisings of April-May 1968, when Mao’-s little red book was a must read, Surowiecki’-s manifesto is indeed perfectly timed to launch a new cultural revolution.
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After the New Hampshire fiasco, 16 18 people came to defend the prediction markets, so far. So far, the best takes are from:
), and Steve Roman.AWOLs (so far): PMIA, AEI-Brookings, InTrade, TradeSports, BetFair, TradeFair, NewsFutures, Emile Servan-Schreiber, Jed Christiansen, Koleman Strumpf, Bo Cowgill, Richard Borghesi, Chris Hibbert, David Perry, Ken Kittlitz, Paul Tetlock, David Pennock, Mike Linksvayer, Brent Stinsky, David Yu, Mark Davis, David Jack, James Surowiecki, Tyler Cowen, Greg Mankiw, Donald Luskin, John Delaney [*], etc.
[*] Steve Bass tells us that John Delaney’-s pre-NH CNBC appearance was awesome. I was up that day, waiting for that CNBC segment, but failed to spot it. If somebody sends me the YouTube link, I’-ll publish it here.
Prediction markets failed to accurately predict the unexpected effect a few tears had on the New Hampshire primaries- and some analysts rushed to blame the tool and undermine its reliability and applicability. Let me restate some fundamentals and my view, in a snapshot:
cross-posted from my blog
Silicon Alley’-s Jonathan Kennedy:
[…] In denouncing prediction markets as “-wrong,”- however, many pundits miss the point. Prediction markets do not provide accurate predictions of the future. (How could they? They simply represent the consensus guess of a group of people who aren’-t prophets). They merely provide the most-informed guess as to what that future is likely to be.
As numerous “-collective wisdom”- studies have shown, the consensus guess is always better than the majority of the individual guesses that are factored into it (not sometimes–-always). The collective wisdom, moreover, is often more accurate than that of ANY individual. Why? Because the market collectively incorporates far more information than is available to any one individual.
Like the stock market, prediction markets don’-t get it right every time. They do, however, provide a useful window into the collective expectations of others–-one that is often the best available estimate of the future. And they do sometimes get it right. Just as they did with Mr. McCain.
Bravo, mister Jonathan Kennedy.
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Take that, Barry Ritholtz.
In an upcoming post, we will review the strengths and weaknesses of these thinly traded prediction markets…-
We are holding our breath, Barry. Hurry up.
Eric Zitzewitz responded to Paul Krugman:
Almost all of the serious people who study or work with these markets are not in the “markets are magic” camp.
My work in this area (with Justin Wolfers usually and Andrew Leigh and Erik Snowberg occassionally) uses these markets as a way of quantifying the conventional wisdom.
This has more value than may be immediately apparent. It can help you get from “the market rose 0.25% in response to Obama’s Iowa victory” to “the market rose 0.25% in response to Obama’s Iowa victory, which raised his nomination probability by 20% and did not affect the Democrats odds of winning in November” to an estimate of how much more stocks will be worth under Obama than Edwards or Clinton.
In corporate settings, a market can help turn something that “everyone knows” into an objective fact that can then be acted upon. The best example is probably markets on whether software projects will be completed on time– if a market run among the project team members says that the launch will be 2 months late, it becomes harder for the project manager to insist that everything is on track.
Eric Zitzewitz
Assoc. Prof. of Econ
Dartmouth College
Thanks to Jason Ruspini for the link. Jason also posted a comment on Paul Krugman’-s post, and also on Felix Salmon’-s post.
Previous blog posts by Chris F. Masse:
John Tierney (and again this morning):
[…] Keeping up with a presidential campaign used to require at least an hour a day of wading through punditry, and much more time during the peak primary season. But now, with a few clicks on Intrade, you can see the accumulated expertise of thousands of people betting on the campaign. […]
That’-s what I mean by “-Prediction markets are forecasting tools of convenience that feed on advanced indicators“-.
I will have another post on John Tierney…- if Barry Ritholtz delivers on his promise to write up on prediction markets.