Political Futures, Revisited

Friday, February 25, 2005 | 09:29 AM

There's an interesting collection of links and data points over at Chris. F. Masse's blog, looking at the most memorable moments in the field of prediction markets in '04.

Readers of this blog know that I find most of these exchanges to be of little predictive value; There are simply too many examples where they are wrong, and by quite large margins, to place much faith in their prescience.

I come in for some razzing for my own views of inefficient markets.

As the 2004 Presidential election futures contracts revealed, traders of political futures followed the polls rather than led them. Indeed, on Election day, futures traders incorrectly surmised a Bush defeat due to early exit polling data. Bush contracts dove to 27 cents, while Kerry's skyrocketed.

I'm not familiar with Masse's politics, but he seems to have given a surprsing amount of weight to  the Don Luskin theory that George Soros was manipulating political futures contracts. How is it that some purchases are purchases, while others are manipulations never gets satisfactorily addressed, but that is irrelevant, as I am unaware of any conclusive evidence that Soros ever made any future trades.

While we're on the subject of paranoid flavored ravings, I note that several other commentators also feared that Soros was going to 1) crash the dollar; 2) crash the stock market; or 3) spike oil prices -- or other nefarious acts pre-election.

I surmise it was political insurance in case their man lost.

The great irony of this discussion is that part of the reason I have such low expectations for political futures is due to Soros' theory of Reflexivity -- that markets themselves can affect the fundamentals of the economy:

"The generally accepted theory is that financial markets tend towards equilibrium, and on the whole, discount the future correctly. I operate using a different theory, according to which financial markets cannot possibly discount the future correctly because they do not merely discount the future; they help to shape it. In certain circumstances, financial markets can affect the so-called fundamentals which they are supposed to reflect. When that happens, markets enter into a state of dynamic disequilibrium and behave quite differently from what would be considered normal by the theory of efficient markets. Such boom/bust sequences do not arise very often, but when they do, they can be very disruptive, exactly because they affect the fundamentals of the economy.”

I find Soros' thesis quite compelling; Its consistent with my own critiques of the efficient market hypothesis, as well as the political futures exchanges. (Remember Dean in Iowa).

As to the hubris-filled chest-pounding over at Chris. F. Masse's blog, consider the following:  I expect to wrong in every single prediction, trade and investment I ever make. No, its not a function of poor esteem or lack of confidence; rather, its a way to ensure that stop loses are strictly adhered to. The less ego a trader wraps up into any one position, the easier it is to follow the discipline and get out of Dodge when required.  Expecting to be wrong at the onset removes the emotion from the sell. Its part of a bigger plan. Mr. Market demands humility from his participants -- get some, or be humbled the hard way.

I see none of that lack of arrogance amongst the prediction markets crowd. Such is life in academia, where you can backtest to you heart's delight, rather than step onto the field of battle.

Theorize this! One of these days, I may have to issue a challenge to these weenies -- real money, real trading, real gains and losses. I'd be curious if they would be willing to step it up . . . 

Friday, February 25, 2005 | 09:29 AM | Permalink | Comments (10) | TrackBack (0)
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Hello Barry,
My politics is that I'm an independent right-leaning libertarian, who would have voted for a Mass. liberal in order to counter the neocons. (Thank God the French don't pick the US president.)
When it comes to Donald Luskin's Soros hypothesis, it's the best idea available as for now. You are free to come up with a better proposition.
We may never know the answer unless someone breaks in the TradeSports/InTrade computer system. Anyone tempted?
Good continuation for your interesting blog,
Chris. F. Masse

Posted by: Chris. F. Masse | Feb 25, 2005 11:46:58 AM

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