Prediction Markets

[This is a draft from a few months ago, but I'm posting it in hopes that it'll prompt me to finish it. Maybe it will stimulate someone to want to hear more (or, do YOU want to finish it? If so, get a copy of "Infotopia" by Harvard Law prof Cass Sunstein, if you haven't already. I started writing this up after reading this book.).]

Prediction Markets are a fancy name for the age-old idea of betting on future events or outcomes, or "putting your money where your mouth is", in other words. In a prediction market, participants can place bets on whether, say, health care will pass, or whether Obama will get re-elected (if he runs), or (more controversially) when the next major terrorist incident will occur on American soil, and so on. Researchers have found in recent years that Prediction Markets are remarkably accurate. In many cases, they outperform the predictions of subject matter experts, and other types of group-aggregation predictors like polls, or deliberative groups. For example, the Iowa Electronic Markets, run by the University of Iowa since 1998, is a popular prediction market that has psroven effective in guessing election outcomes. The IEM results had Bush with 50.45% of the vote, and Kerry with 49.55%, compared to the actual 51.56% for Bush and 48.44% for Kerry. The result, based simply on people placing bets on the final outcome of the election, outperformed professional polling results.

The question is, why? Why is betting such a powerful tool for predicting the future? Participants in Prediction Markets--bettors--don't have to have a Ph.D. in the electoral process; they don't have to have access to special information; they don't really need any credentials at all, short of agreeing to partipate by putting up some initial money and hoping to get more by guessing correctly. And yet, collectively, the Prediction Markets often outperform the experts.

The story of why Prediction Markets (hereafter PMs) work so well is best told by telling another story, one of how deliberative groups often don't work well. In a deliberative group, members, well, deliberate: they discuss and analyze some topic or set of possible outcomes and decide on a course of action, or a most likely outcome, or a best policy, depending on what is getting deliberated. Deliberative groups often do produce good outcomes (perhaps the most famous example of the success of deliberation is the ratification of the American Constitution, where sustained discussion about the details of the Constitution resulted in the document we have today).

BP Mystery

The BP oil spill mystery: why did the blowout preventer fail? No one seems to know. BP experts inform us that there are multiple safety mechanism in place, and they all failed. Huh? I'm certainly not qualified to comment on the technical merits of oil rig safety devices, but the case is interesting because of its complexity and because of the unlikelihood of multiple safety procedures collectively failing. This is the sort of complex, high energy accident I was talking abou in Systems Accidents. I'll be following this story to see how it unfolds. For starters here's a good discussion in a blog.

Not Equal As In Math (and also not really equal at all)

Senator Lindsey Graham assures us that he cares equally for the immigration and climate change issues. This is manifestly an odd statement, even allowing for the colloquial quality and inexactness of much natural language. There are all sorts of reasons one should try harder to be more worried about one of these than the other: if you were a catastrophe type of the Gore stripe, for instance, you'd presumably care a helluva lot more about failing to address the warming planet than you would a political issue like immigration reform. (Global catastrophic disaster versus an ongoing issue with undocumented immigrants, I mean.)

If, on the other hand, you were skeptical--like the majority of Americans--about the veracity of the Global Warming notion in the first place(the hypothesis that the warming of the Earth is or will become destructive, and that it is human-caused), you'd likely care more about the socio-economic-political consequences of the immigration issue than speculative scientific views about possible outcomes driven by folks with one foot in atmospheric science and the other in politics. Not much use getting worked up about catastrophes that aren't really going to happen.

And so the issue here is not Graham's implausible ceteris paribus exhortation to curry favor with voters (which means: everyone who was listening to him), but rather a somewhat deeper issue about science, that it's still and I suppose necessarily, and essentially, about what's true, and so our degree of belief in scientific claims is largely still what matters when determining how much we care. Senator Graham, for his part, just cares a damn lot, and equally so. But for the rest of us, whether we believe, in some robust apolitical sense, that a claim is factual or not, weighs heavily on how much value we give issues that rely on these claims for their moral or ethical force. It determines, in other words, how much we'll care about them.

Coda

Fair readers of this blog, you've now been armed with the tools of reason. The next time a Global Warming Alarmist accuses you of not caring, cheerfully agree that, yes, in fact you don't care much. And the reason of course is that you don't have a strong belief in the factual claims, and hence the issue itself is a dubious recipient of your care. (When this elicits howls of protest about taking care of the planet, tell them that you DO care about THIS issue. Then you'll have owned the part that matters--the environment does require our care--and jettisoned the stupid politics of alarmist science, pushing the speculative theory part back to the controlling alarmist, keeping the General Environment issue that she wanted to invoke, shiftily, as proof of your moral turpitude. If she then counters with something about "leaving it to the scientific experts", point out that many experts actually disagree on this issue (which is quite true), and ask which experts we should "leave it to". This will likely elicit a pathetic response about "many more think it's true than not", to which you inquire about whether scientific facts are properly established by popular vote. If this leads into the weeds, just ask the alarmist to name another scientific theory that is considered established in the same sense as the Global Warming Catastrophe theory. This is a devastating question, because if she's honest, she'll have to abandon hard science completely, and the discussion will end up with something squishy like economic theory. At this point you've won, though the Alarmist may hang on for a while if only out of stubbornness. Don't worry about this, though, because you're a wascally wabbit for the control-minded alarmist at this point, and even if she grumbles or blusters a bit, she'll soon sulk away to find some easier target. But it won't be you, not anymore. Because you're armed. You're ready. Really.)