Wednesday, July 30, 2003

The god that sucks
James Surowiecki wrote about the terror market in the 3/24/03 New Yorker:
The market in Saddam futures is the latest version of what are sometimes called "decision markets." They've been around for more than a decade, and in that time their track record in forecasting events has been exceptional. The best-known example is the Iowa Electronic Markets. The I.E.M., which was founded in 1988 and is open to all comers, allows people to buy and sell shares based on the percentage of the vote that they think candidates will get in upcoming elections. At any moment, the price of a candidate's shares reflects the market's collective judgment of how well he'll do. If George W. Bush's shares are trading at 56.4, the market is anticipating that he'd get 56.4 per cent of the vote.

The I.E.M. routinely outperforms major national polls. In the last four presidential elections, for instance, almost six hundred different polls were conducted, and the I.E.M.'s market price on the day each of them was released turned out to be closer to the election results seventy-five per cent of the time. And the I.E.M.'s election-eve predictions in those four contests were off by an average of just 1.37 per cent....

Why do decision markets work so well? They are extremely efficient at aggregating information and tapping into the collective wisdom of a group of traders, and groups are almost always smarter than the smartest people in them. As in financial markets, the incentive to get the better of others (whether the reward is profit or mere satisfaction) causes traders to seek out good information. The absence of hierarchy -- markets don't have vice-presidents -- insures that no single person has too much influence and that diverse viewpoints don't get shut out.

The Policy Analysis Market was thus an application of market fundamentalism to the problem of "good, solid, sound intelligence". Pulling the plug on PAM constitutes a statement of confidence in "intelligence" that has repeatedly been shown to consist of politically-motivated lies, forgeries, and 10-year-old term papers. And the stupid attacks on the program from our elected representatives fundamentally misunderstand the problem. Which (notwithstanding the protestations of Suroweicki and others) is primarily one of faith in the market-God.

7/31: doug v. brad


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