Pursuit of Truthiness

my gut tells me I know economics

Archive for the ‘prediction markets’ Category

What Time Travel tells us about Doing Good

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If you were transported back in time a few years with all of your current knowledge, what would you do?

You probably have a lot of ideas about things you could do differently in your personal life. But, say your goal is to make the world a better place. How could you best use your knowledge from the future to accomplish this?

The first idea that comes to my mind is to think of the biggest disasters of the past few years and how they might be stopped or mitigated. But most of these would be near-impossible for one person prevent even knowing that they would happen. How could I, as a grad student in the US, have prevented the Syrian Civil War? Or prevented various countries from sliding toward illiberalism or dictatorship? Credibly warned people about earthquakes or tsunamis? About the best you could realistically hope for is tipping off authorities about a terrorist attack, and even there you would to remember more about the exact times, places, or perpetrators than most people do and find a way to communicate this credibly (“Hi, 9-1-1? I’m a time traveller and I have some information that you’ll really want to…. hello?”).

The second idea that comes to mind is to accelerate progress by bringing back knowledge of future inventions and discoveries. But again, the problem here is that most people don’t have enough detailed knowledge in their heads to make a difference. CRISPR sounds cool but not only could I not reinvent it myself, I probably couldn’t explain it well enough to speed real biologists along the path to discovery. Even in my own field of economics its hard to think of any real breakthroughs I could bring back.

So, would anything really work? The only thing I’m confident in is the Biff Tannen strategy of turning knowledge into money, and money into influence. Biff’s book of future sports scores would be a great way to cash in. But even barring that, a basic memory of the most successful teams to bet on, companies to invest in (e.g. early Facebook), and out-of-the-blue alternatives like BitCoin would be helpful. A few successful investments give you a bigger capital base for the next ones. Then, you can use the money to try to do good in the world, for instance by giving it to effective charities.

What is the lesson from all this? First, that Dustin Moskovitz is a time traveller. It also makes me wonder about my current strategy of trying to improve the world mainly through research, rather than “earning to give“. The most general lesson, though: we usually think that decision-making is hard because we lack information about the future, and we spend lots of time trying to guess at what the future might look like. But this concern could be overrated. Even having a pretty good idea of what the future looks like doesn’t necessarily mean making decisions or having a big impact will be easy.

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What Do Markets Predict About Obama’s Second Term?

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While I saw this a Coke vs Pepsi election with no real differences between candidates, it seems that markets do expect some difference. If you believe the Efficient Markets Hypothesis (which I mostly do), then markets will reflect the best guess that can be made about the future by taking all publicly available information into account.

According to prediction markets, there was a 70-80% chance that Obama would win as of Tuesday afternoon; by Wednesday morning after the election this was 100%. So we can try to attribute any change from Tuesday to Wednesday as representing the effect of a ~25% increase in the probability of an Obama presidency. Multiply the effect by 4 to get the total difference between an Obama presidency and a Romney one. (If you believe the prediction markets. I am still kicking myself for not funding accounts in time to arbitrage between them)

The most obvious reaction has been that the US stock market declined about 1.5% from close on Tuesday to opening on Wednesday. This means people think stocks will be about 1.5*4=6% less valuable during an Obama presidency. It is unclear to what extent this should be interpreted as the economy generally doing 6% worse, as opposed to stocks alone being a worse investment as taxes on capital gains and dividends increase / fail to decrease.

Treasury bond yields decreased slightly, meaning that markets think the government is less likely to default under Obama, or alternative assets will perform worse, or both. I’m not used to calculating the TIPS spread, but it looks like nominal 5 year treasury yields decreased by 4 points more than real yields, meaning a 0.04 percentage point decrease in inflation expectations (meaning overall inflation would have been 0.16% higher under Romney? Perhaps people expected him to appoint Mankiw as Fed chair). On the other hand, gold prices increased ~0.5%. No big differences here.

The biggest difference, and in my opinion the best news, seems to be on foreign policy. Intrade has a prediction market on whether Israel or the US will make an overt airstrike on Iran by the end of next year. This declined from 49% to 37% as the election news came in, suggesting the chance of this happening would have been 4*12+49=97% had Romney won. The chance that China will take overt military action against Taiwan also declined from 10% to 3% on Intrade. These markets are thin enough that I don’t claim they are definitely right, but it is still good to see the chance of war declining.

Comparing the changes in these various markets gives a clear demonstration of what economists have often said– the US President has very little influence over the economy, but quite a bit of influence on foreign policy.

Written by James Bailey

November 12, 2012 at 7:42 pm

Two months to the Ceremony: Its not too late to earn that Peace Prize

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As far as I can tell, no one has actually accepted the Nobel Peace Prize while they were prosecuting a war, much less two.  Lê Ðức Thọ was offered one while involved in the invasion of / civil war with South Vietnam, but refused to accept the award.

I see three logical possibilities for this year’s prize.   Obama could accept the award while dodging accusations of hypocrisy.  Or he could pull a Lê Ðức Thọ/ Jean-Paul Sartre and refuse it.

But the most intriguing possibility is that Obama could earn his award, and end the wars in Iraq and Afghanistan in time for the ceremony on Dec 10.  While he’s at it, he could sign a pact with the other nuclear powers to destroy all of the world’s weapons.  And veto any renewal of the PATRIOT ACT.

Don’t say it’s politically impossible, Obama has the power to everything except the arms treaty unilaterally, with approval from no one.  But if anyone out there believes he will really end the wars soon, all I ask is that you put your money where your mouth is.  If the wars will be over in two months, you could make a fortune shorting the stock of every publicly traded U.S. defense contractor.  Let me know how that goes!

Written by James Bailey

October 9, 2009 at 2:52 pm