Over the new-year break, I introduced the annual predictive-markets game (see "The wisdom of the openDemocracy crowd", 29 December 2006). Based on the Hayekian notion that markets are ways of hovering-up information that otherwise would lie idle, these markets turn prices into probabilities by allowing participants to trade stocks in future events. Glamourised gambling, really - but put to the good use of representing the crowd's wisdom - in this case the crowd that is us, openDemocracy readers.
A little more than a month into the trading, here is my first market report.
(You need to be a signed-in openDemocracy member [which is free] before trading).
We have twenty-six predictive markets running and over 180 registered traders. Eight of the markets were created by traders other than me. One market closed - sam.alame's market that "Lebanon would have a new government by the end of January", returning a tidy sum to anyone who bet against Sam's optimism. Other popular markets have covered Lebanon, global warming, Fidel Castro, and the "Gitlin question" - more on this below.
Our most popular stock is the outcome of the French presidentials, and within that market, the oD crowd is backing Ségo against Sarko by a 10% margin. The stock was heavily traded in early January, when the relative prices looked most out-of-kilter. The theory of information in markets predicts that only new beliefs will change prices, and it seems that since then, beliefs have not changed much - except for a slow narrowing of Ségo's lead.
Opinion polls disagree with openDemocracy on this one, and typically put Sarko 3% points ahead of Ségo. Is there something we should be sharing with the world, or is this the triumph of sympathy over greed?
Not in the case of the market's most successful participant. Alejandro Millán Mon did better than any other non-staff trader in the French market in January. He wrote, saying:
"I am a Spanish physician fifty years old, married with four children. I work as a specialist in internal medicine in a public hospital. I have been working all my life as a doctor, except eight years working in the local government in the time of (Josè Maria Aznar's period) as president of Spain.
I did not understand much of the predictive markets, but it was fun to give an opinion
My prediction does not respond to my wish. I prefer (Nicolas) Sarkozy. I think he will confront better French problems."
However, the survey results of openDemocracy readers' political leanings make me doubt that pessimism over Sarko is the major reason for openDemocracy's relative over-valuation of his rival Ségolène Royal's chances.
The ethics of prediction
France has almost twice the traders of the next most popular markets - the middle-east conflict and global warming. Why? Maybe the comment made by Katherine Hudson (openDemocracy's fundraising manager) about the Lebanon war market resonated more widely. Katherine felt uncomfortable betting on appalling outcomes:
"... I find the prospect of betting on a war an ethically interesting - and difficult -one. I hope Lebanon doesn't suffer another war. But hope should not be the basis of a bet. And I'm uncomfortable with betting for a war.
Once one has bet on something, a cool rational decision becomes a decision one has an emotional and/or financial investment in. The inklings here are granted rather than bought. But what if we were to say that the inkling were to follow the lead of the Second Life linden and have a real-world value? Then, if one bet on there being a war, and profited on trading on this assumption, one would in a strict sense be a war-profiteer."
Is forecasting profiteering? After all, if you said, with a pessimistic tone, in 2003 that Iraq would be a disaster (as John Le Carré did in our pages), then your reputation for wisdom becomes enhanced by the disaster that has followed. Reputation is a sort of payment; does that make every Cassandra a disaster-profiteer? I see what Katherine means, and I agree that it would be wrong to make the proud satisfaction of "I told you so" outweigh the pain one should properly feel at terrible events. But prediction is useful, and the useful should be rewarded.
Our very own inkle plutocrats, those lumbered with an embarrassment of rewards for their wisdom, are a mixture of openDemocracy insiders and outsiders. Tan.Copsey tops the list. He is an editorial assistant on openDemocracy and our sister publication, chinadialogue. He has already commented on his trading strategies - even admitting on our podcast to "Enron-scale insider skullduggery" to amass his vast pile of inkles.
Discounting without disrespecting staff successes, I looked up some of our "outsider" sophocrats. As of 28 January, one of our top performers was Pete Hauschka: "I live in Cantwell, Alaska. Cantwell is a small town of about 150 people near Denali National Park. I am the principal, a teacher, a coach, and general troubleshooter and problem solver at the small community school." Can I recommend the link to the satellite picture - you'll get an idea of how beautiful, dark and cold it must be right now. Pete confirms:
"This time of year in Cantwell it is typically -25 or below in the morning when I wake up, and dark. We have our cars plugged in, but I have to get them going and cleared of snow, often there is more snow to shovel. Sometimes there are caribou bedded down in our snowy yard, or a moose standing nearby, so I look both ways before going down the steps. It is still dark when I get to work. Our school district website is www.dbsd.org."
Pete has done pretty well across many markets (or had - the list of All-Time Greats, taken two weeks later, shows how fickle the markets can be: Pete is now at number 9). He thinks of himself as a Warren Buffet amongst predictors: "I mostly stayed in trades, perhaps lending credence to a long horizon investing strategy." He has spent three years in the middle east and has done well in those markets. He is going against the openDemocracy current on 2007 being the warmest year on record: understandably hard to believe with the caribou lying in the drive? Pete's great idea for a new market: "Shipping lines (container cargo etc.) will regularly use the Northwest passage by the Mid-summer of 2008" - one I shall add.
If Pete is a "fundamentalist" - someone who trades on what he thinks is really going on, sam.alame, the top outsider today on our lists, is a "sentimentalist". Here was one of his coups:
"Needless to say, I found it more profitable to bet on people's reaction to events than to bet on the events themselves. Actually, there were a few trades that I carried out against my own predictions but in line with what I anticipated the prediction of the crowd to be. One such example is buying shares of "Will the US engage Syria" when the American death toll in Iraq reached 3000. At that point I wouldn't have necessarily expected the US to directly engage Syria diplomatically, but I knew that the scenario was going to be seen as likely given the political climate."
Sam lives in Montreal, where he works as an analyst for a healthcare research company. "My job entails producing data that is used by the pharmaceutical industry as marketing intelligence and by governmental agencies as healthcare indicators." Maybe being steeped in numbers all day allows Sam to relax in the evenings by looking into the infinite mirrors of market sentiment. Sam contributed the Lebanon government prediction to the marketplace.
The Gitlin market
My own favourite market is the Todd Gitlin prediction. Todd's challenge is this: think of the three worst things that are remotely likely to happen next year; then predict that something even worse than that will happen. This stock, traded simply as "BAD" on the exchange, now stands around a 70% likelihood of worse.
Of course, calling the outcome one way or the other was hard on this market, so I promised to do it with reference to the openDemocracy community as a whole: would a poll amongst us, taken in December 2007, deem that worse had occurred than genocide in Darfur, Aids misery or the vast draining of resources into military use? This is a market about the way we will come to judge the year, and we are currently pessimistic about that.
But this is a market about our outlook as much as about what happens. I was puzzled at first by how fast the market turned to gloom. Would it have done so under a different United States president? Or if the depth of the Iraqi miasma were not every day made clearer? Maybe ... but maybe it is also inevitably the position of idealists to be pessimists, for we, at least, have a standard against which to measure expectations.
I am still not sure what exactly the Gitlin market actually measures - do post your answers below.
We are forecasting:
- there is a 31% chance of UN troops in Somalia
- no UN troops in Darfur by the end of February
- a 38% chance that Israel will bomb Iran's nuclear installations - which, given Paul Rogers's assessment of the consequences, is a frighteningly high number.
On a lighter note, Manchester United is favoured over Chelsea as the Premier League football winner, and Samson has more chance than St Francis or Saladin of being the subject of Mel Gibson's next film.