The Predictions of Prediction Markets
On TradeSports a contract of George Bush in the winner-take-all market is currently selling for around $7. But what does this actually mean? Most traders and researchers would argue that 0.7 is the current “market probability” that the event “George Bush wins the 2004 presidential election” occurs. But this answer drives Charles Manski, an economist who recently also published an article in the September issue of Econometrica, crazy.
He says that under not-so-far-fetched assumptions, the price of a contract reveals nothing about the dispersion of traders’ beliefs and partially identifies the central tendency of beliefs. A President.GWBush2004 contract trading at 70 reveals that 70 percent of traders believe the probability of the event “George Bush wins the 2004 presidential election” to be larger than 0.7. The mean subjective probability of this event lies somewhere in the open interval (0.49, 0.91) (price/mean belief region).
No doubt the last word on this issue hasn’t been spoken but if Manski thinks he can figure out a way that market estimates are biased (for example by narrowing the set of possible belief distributions), then he should be able to come up with a market trading strategy that consistently makes money. And if he succeeds at that, he will in the process correct the market estimate.
Spam Bounty
Last year, Larry Lessig and Representative Rep. Zoe Lofgren (D-San Jose) proposed a system of mandatory spam tags, i.e. something like mandatory use of [ADV] in the subject line and, as a method of enforcement, bounties for people who tracked down illegal spammers. Lessig liked the idea so much he offered to quit his job if the bill became law and didn’t substantially reduce spam. Now that’s a guy who believes in incentives!
Lessig won’t have to quit his job anytime soon, however. After studying the idea the FTC has recommended against bounties aimed at cybersleuths but they do allow that large bounties aimed at insiders could be useful.
Some of the FTCs objections are unclear. At one point they say that “potential informants who lack subpoena power, and who are not ‘insiders’ possessing personal knowledge of the spammer, are highly unlikely to possess or produce the kind of information deemed most useful to the Commission.” But elsewhere they say that cybersleuths “already provide useful information to the public for free, and may not be further motivated by the prospect of a monetary reward.” So which is it? Is the problem that the information provided by cybersleuths is not good enough or is it that the information is good but we already get it for free? Admittedly these sentences are not necessarily contradictory if one riffs on the distinction between the Commission and the public. It’s unclear to me, however, why the FTC resorts to speculation about the sort of information that cybersleuths can produce when some examples of what they have produced in the past would give us a better idea about what stronger incentives could accomplish.
The FTCs main objection is that they could not handle the resulting flow of mostly low-value information. The FTC already receives 300,000 forwarded spam-emails a day and doesn’t want a slew of further emails from bedroom bounty-hunters.
America’s Most Wanted, however, doesn’t offer rewards for the arrest of any criminal they offer rewards for ….America’s most wanted criminals. A spam bounty system could similarly limit the number of low-value tips by focusing rewards on the spammers responsible for the particular pieces of spam that went out to the most people – the FTCs database already has this information. Rewards could also be limited to sleuths offering specific information.
Large rewards for insiders are a good idea, Microsoft caught the author of the Sasser worm with help from bounties. I’d like to see some more research and experiment, however, before counting the cybersleuths out.
Addendum: More on real bounty hunters here.
Robert Barro vs. Robert Reich
Here is their brief and entertaining debate over the economy and short- and long-run trends.
Here’s one good bit from Barro:
The difference between now and the late ’80s and the ’90s is when there was a deficit, it provided a lot of fiscal restraint, holding down spending levels. It doesn’t yet seem to be working that way today, that’s the thing that troubles me.
Yes, Bush and the Republican Congress are at fault, but I wonder what deeper is going on. The simplest hypothesis is that politics is more competitive now and voter wishes are harder to ignore. That induces all parties to ratchet up spending, even though they know it is bad in the long run. The classic Brennan-Lomasky story is that people vote for welfare programs to feel good about themselves, whether or not they would choose those same programs as a decisive voter. We now seem to have a world where people pay lip service to free market ideals, and want to hear candidates (i.e., Bush) pander to those ideals in their rhetoric, presumably to feel good about themselves. Then everyone turns around and supports further growth in big government.
Thanks to The Sports Economist for the pointer.
Our Austrian Economist Guest Blogger
We are delighted that Michael Stastny, author of the excellent Mahalanobis blog, will be guest blogging with us this week. Michael is a true Austrian economist – he studies economics at the University of Vienna! Alas, he tells me that Menger, Böhm-Bawerk, and Mises are never mentioned in his classes and Hayek wouldn’t get a mention either, except for the fact that he “worked together with Pinochet so closely.” How sad. Truly, one has to come to Vienna, VA to study Austrian economics!
Tornado II
It was raining hard and I was stocking up at the video store with my kids. Coming out of the store I was shocked to see a soot-black, swirling cloud, full of malice not far away. I bundled the kids into the car and headed home! My house was fine but tornadoes touched down throughout the area ripping roofs off homes and in one amazing Washington Post picture (not online) impaling a wooden fence-post through a wall.
Arrival
I am enjoying my first day in Paris, and tomorrow I start a five-day stint for the State Department. The Star Wars DVD set is advertised more heavily here than back in Virginia. (Remember the Australian who said something like “Any country that makes a movie like Star Wars deserves to rule the world”? I once cited this and many readers did not realize it was meant ironically, both by him and me.) The French have the new Che Guevara movie, but not yet the delightfully retro Sky Captain. The new Philip Roth novel appears to have been translated into French already. You will continue to hear from me and Alex, and to make up for the trade imbalance we are importing a European guest-blogger…stay tuned…!
Spinning blogs
The blogosphere has congratulated itself on how quickly it punctured the CBS memo story but was this really an example of a spontaneous order or was there a different sort of invisible hand working behind the scenes? Henry over at Crooked Timber has more. But from whence comes the counter-spin?
How the Internet saved bookstores
Most of all used bookstores; read more here.
And here are the most requested out-of-print books.
Markets in everything, the saddest installment you will likely see
A thousand rubles, or about $34, was enough to bribe an airline agent to put a Chechen woman on board a flight just before takeoff, according to Russian investigators. The agent took the cash, and on a ticket the Chechen held for another flight simply scrawled, “Admit on board Flight 1047.”
And this was not the first time:
Authorities have acknowledged that a similar group of gunmen paid off police in 2002 as they transported a virtual armory of assault rifles, hand grenades and explosives all the way from the south to Moscow, where they seized a theater filled with patrons. The subsequent standoff left 129 hostages dead. “They admitted it,” Satarov said. “But it was two years ago, and nothing has been done.”
And it has been nine years since Shamil Basayev, the Chechen guerrilla leader, led an assault force that took over a hospital with more than 1,000 people in the southern city of Budennovsk. That attack ended with more than 100 civilian deaths. Basayev later told an interviewer that he had gotten past police road stops with $10,000 in bribes and had intended to go all the way to Moscow but stopped in Budennovsk because he ran out of money.
Here is the full story.
Blog coverage
The ever-excellent Daniel Drezner offers some useful words about how he chooses blog topics. I speak only for myself, and not for Alex, but here are a few guiding principles behind my blogging choices:
1. Institutions and ideas matter more than particular leaders or candidates.
2. The blogosphere already covers Iraq, gay marriage, and the election — or whatever else is the topic of the day — to an extreme.
3. The intersection of academic learning and public policy is ripe territory.
4. The long-run impact of science on our lives is commonly underrated.
5. Personal attacks, whether on public figures or other bloggers, usually are not very interesting.
6. Some (small) percentage of the posts should be utterly idiosyncratic.
7. Most of all, I should be interested in the topic.
In reality, number seven reigns supreme.
Why did Sony pay $5 billion for MGM?
Press coverage cites two reasons:
1. The MGM film library is extensive. It includes the James Bond franchise, the Pink Panther movies, and about 8,000 other titles. The new Sony/MGM group would own a substantial fraction of the color movies ever made in Hollywood; one source says half.
2. Sony will try to use its larger film library to become format king for the next generation of high resolution DVDs. But note that new movie issues, rather than the back catalog, may have greater influence on the new standard.
Note that Comcast is part of the deal as well:
Comcast is fresh from a defeat in its audacious bid to acquire Disney (and its Buena Vista studio) earlier this year. In addition to its distribution deal with Sony, it is also understood to have an option to acquire 20% of MGM for $300m. Both agreements underline the belief that drove the Disney bid: that owning content is essential to Comcast’s target of reaching 40m customers by 2006. Indeed, Comcast’s involvement is symptomatic of a broader trend in America’s media business: consolidation between those who make music, movies and television programmes, and those who distribute them, whether via broadcast networks or, increasingly, via cable, satellite and the internet.
I see two possible scenarios. Under the first, the current DVD gold mine will continue until it is displaced by some version of video on demand. Film owners will continue to reap the profits, but buying into film libraries late in the game should not bring extra-normal returns. Under the second scenario, DVD buying will dry up, just as CD buying for classical music has dried up. Once people build up the basic library they want, they buy at a much slower rate. Both DVDs and video on demand will become less profitable over time.
I’ll weight these two options at about 50-50 in terms of proportional relevance. But regardless of which view you hold, I would not want to be bidding for old film titles in a competitive environment.
Tornado!
I just saw a tornado! Holy sh__! Luckily, I am now at home in the bunker with the family.
Would Kerry be more protectionist than Bush?
Here is Daniel Drezner, channeling the Indian economist (and Democrat) Jagdish Bhagwati.
New currencies around the world
With paper bills so rancid even beggars hate to touch them, French-speaking West African gets down to serious money-laundering today. An eight-country campaign aims to retire more than $1 billion in decaying currency seen as much as vectors of disease as units of exchange…
The old ones, they are just disgusting,” merchant Mohamed Hussein said at his wood-shelf storefront in Dakar. “NInety-five percent of people who fall sick are because of filthy money,” he said, pulling out a bottle of liquid soap he keeps under the counter for every post-purchase scrub-down.
That is from the 15 September USA Today, p.14A, not currently on-line. Here is a related story, here is another.
Closer to home, the new look to the U.S. nickel makes Jefferson look like a cadaver; click on “Gallery,” through the link, for a clear view.
The Sledgehammer of Wow
By this point in life I’ve stuffed so much material down my gullet I feel I am hard to impress. When it comes to new books and music in particular, I can go many moons without feeling The Sledgehammer of Wow. But yesterday I felt it twice:
Blueberry Boat by The Fiery Furnaces dispays a level on ongoing invention that one expected from Brian Wilson circa 1968.
Susannah Clarke’s Jonathan Strange and Mr. Norrell: A Novel has been called a “Harry Potter for grown-ups”; it starts by asking whether magic has disappeared in England. Only rarely have I been captivated so quickly and so deeply by a novel of our time. Read the ever-insightful Henry Farrell (CrookedTimber.org) on this wonderful book. Here is another good review, also courtesy of Henry; here is a Slate.com review.
On a sadder note, Johnny Ramone has passed away. “Twenty-twenty-twenty-four hours to go, I wanna be sedated…!”