Long-time readers will remember that I was advocating the Tradesports betting market for predicting political outcomes almost two years ago. Well, now that the President has nominated John Roberts to the Supreme Court it appears that Tradesports picked the winner approximately two hours before he was publically announced. That's earlier than any major news outlet. As Jim Linggren points out, markets do better than experts even when they don't do very well.
My claim is a comparative one. Markets should do a better job than experts who lack actual inside information of the choice for a number of reasons that are raised in the comments to one of Orin's earlier posts. I would think this would be true both for predicting individual decisions and for predicting voting or future big market decisions, though I don't know what the state of the empirical evidence is on this narrower point. ...I am claiming that markets (however "good" or bad they are in absolute terms) should be better than experts on balance, or at least better than experts who lack actual first-hand knowledge of the forthcoming decision. So Orin and I may be talking past each other. I am asserting that I would expect a comparative advantage for markets over experts; Orin is questioning whether markets would "do a good job" predicting individual decisions compared to group ones.
Some predictions are very hard to make, and markets are often wrong, but in the long run they're going to do better than any individual or group of individuals at predicting the future. Although Orin Kerr dismisses a market's ability to aggregate data, aggregating data and determining its value is the best that any instrument for predicting the future could possibly do.
On a related note, I've put my money where my mouth is and divested myself of most of my niche mutual fund holdings in favor of broad index funds. Mutual fund managers can't beat the market over time.
I totally agree, as long as the market isn't manipulated. I seem to recall two examples of manipulation in this kind of predictive market: Recently, a market on who would die in the new Harry Potter was corrupted by people with inside information working for the printing company. And before the presidential election, a market predicting that outcome was allegedly corrupted by people willing to throw their money away to skew the results.
So markets work, but only when they work. The tough question is: What are the preconditions for a working market, and how do you know when those are met?
BB: In the Harry Potter situation, did the insiders skew the market towards the truth or towards a false pick? As for the second, George Soros did the same sort of thing on a much larger scale, allegedly. It's true that people with large (relative to the size of the market) amounts of money can corrupt markets. But money can corrupt any realistic prediction mechanism.
That's a good point on Harry Potter. The inside information did make the betting more accurate.
On the Soros manipulation, it wasn't money per se that corrupted it. It was a breakdown in an assumption about the market, though offhand I can't quite articulate what that assumption is. Perhaps it's that what people want is available in the market. In the case of the political prediction market, the only thing you could get out was money. So that market was only going to work to the extent that people wanted money. Soros didn't care about money; he wanted to pick the result of the market itself.
So try that hypothesis: Markets only generate accurate information to the extent that the market provides its participants with what they want. In the Harry Potter situation, the scammers were after the money that the market was providing. In the Soros situation, that market couldn't provide Soros with what he really wanted, which was to turn his dollars into votes for Kerry.
Come to think of it, I believe that people have tried to form the kind of market that Soros really wanted: People literally selling their votes online. But there are laws against that sort of thing in most if not all states.