# Worst News of the Day

The market at Intrade is predicting a probability of a U.S. Depression (10% or greater decline in GDP) in 2009 to be 56%. I am shocked. The probability is up significantly over the past two weeks. Why?

**Addendum**: MR Readers are fast! Within two minutes Marc points us to this post from Donald Luskin who says that it is a contract error. Here is the key clause from the contract:

For expiry purposes a depression is defined

as a cumulative decline in GDP of more than 10.0% over four consecutive

quarters [

(annualized) GDP figures (as detailed below). If these annualised

figures add up to more than -10.0% over four consecutive quarters then

the contract will expire at 100.

as a cumulative decline in GDP of more than 10.0% over four consecutive

quarters [

**that sounds ok, AT**]. This is calculated [**here is the error**] by adding together the published(annualized) GDP figures (as detailed below). If these annualised

figures add up to more than -10.0% over four consecutive quarters then

the contract will expire at 100.

As Luskin notes

The problem is that if you add four quarterly

change-figures that are already each annualized, you will get a far

larger cumulative result than the actual change over a four-quarter

period. Suppose there are four successive quarters each showing an

annualized 2.5% decline in GPD. Intrade will add those together and get

10%. But over the year, the annual decline in GDP will acually be 2.5%.

change-figures that are already each annualized, you will get a far

larger cumulative result than the actual change over a four-quarter

period. Suppose there are four successive quarters each showing an

annualized 2.5% decline in GPD. Intrade will add those together and get

10%. But over the year, the annual decline in GDP will acually be 2.5%.

Thanks readers, I was about to open an Intrade contract to bet heavily against!

Hat tip to Tim Groseclose.