Prediction Markets’ take on American politics, public policy, and the economy in 2010

Intrade.com publishes the “Intrade Gazette” every two weeks.  The “Intrade Gazette” is essentially a newsletter that comments on the prediction markets’ take on any number of topics.  Anyway, I just received the 1/28/2010 “issue” via email today, which I reproduce below.  The previous (1/14/2010) issue is available on the web at http://www.intrade.com/Market_Moves/20100114/newsletter.html.

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“After having just delivered his first State of the Union speech, it’s a good time to look at what the Intrade markets are predicting for President Barack Obama in 2010.

Much has been made of the President’s falling approval ratings, which according to Real Clear Politics currently stand at 48.7% – a similar rating to both Jimmy Carter and Ronald Reagan after their first year in office. The Intrade markets suggest this rating will likely hold steady for the immediate future. There is 73.5% probability the President’s approval rating will remain above 45% at the end of March, and a 43.6% chance it will climb to above 50%. The figures for the end of June paint a similar picture: a 75.0% chance of an approval rating above 45% and a 40.0% chance it will be above 50%.

The continuing lack of cooperation from Republicans and the loss of that key 60th Senate vote will make it tough for the President to advance his domestic agenda in 2010. The market gives his heath care reforms only a 34.0% chance of being passed before the end of June. Another of his signature policies, a cap-and-trade system to regulate carbon emission, currently only has a 19.9% probability of being established. Early trading also suggests the President will be unable to close Guantanamo Bay detention camp before the end of the year.

What about the economy? The market shows it should continue to grow, with a 90.1% probability of positive growth in Q1 of 2010 and a 86.0% probability of positive growth in Q2. The chance of the economy slipping back into recession during 2010 are only 18.7%. But according to the market, unemployment will continue to be a problem. There is a 65.1% probability the unemployment rate will remain above 9.5% at the end of the year, and a 44.9% probability it will climb above 10.0% at year-end. The stock market is not expected to see significant growth. The Dow Jones Industrial Average has 56.0% chance of staying above 10,000 and a 49.1% chance of being above 10,500 at the end of 2010.

2010 is shaping up as a tough one for President Obama. And to top things off the Democrats will most likely be operating with reduced Congressional majorities after November’s mid-term elections. The bright side? The market shows a 58.4% chance he will be re-elected in 2012.”

“Fear the Boom and Bust” Hayek vs. Keynes rap video

I recently became aware of a very clever video production which compares and contrasts the ideas of two “famous” dead economists, John Maynard Keynes and Friedrich von Hayek (hat tip to my UGA colleague Jim Hilliard).  The video, embedded below, is from the Econstories website.  This website bills itself as “…a place to learn about the economic way of thinking through the eyes of creative director John Papola and creative economist Russ Roberts”. 

I also highly recommend Russ Robert’s Econtalk website, which provides an ongoing set of podcasts featuring (see http://www.econlib.org/library/About.html#econtalk) “…one-on-one discussions with an eclectic mix of authors, professors, Nobel Laureates, entrepreneurs, leaders of charities and businesses, and people on the street. The emphases are on using topical books and the news to illustrate economic principles. Exploring how economics emerges in practice is a primary theme.”

 

Assorted Links (1/25/2010)

Here’s a list of articles that I have been reading today (organized by topic):

Economics

Peter Schiff provides some fascinating commentary on the American Samoan economy and the assortment of unintended consequences associated with the imposition of the federal minimum wage by the US Congress (recorded January 17, 2010):

Financial Crisis and Public Policy

Wallison’s analysis seems quite clear; specifically, that in failing to properly differentiate between banks and bank holding companies, an unintended consequence of the “Volcker Rule” may be that banks will be incentivized to overinvest again in real estate, thereby virtually guaranteeing yet another bank crisis in the future.

Foreign Policy

“If the country is ever to develop it will need less cronyism and more transparency.”

Health Care Reform

Keith Hennessey officially pronounces Obamacare as Dead on Arrival, and also provides a interesting example of Photoshop!:

Humor

“Conan was the Czechoslovakia of late-night TV.”

Politics

“Massachusetts may signal an end to old ways of fighting.”

The Minds Behind the Meltdown?

Today’s Wall Street Journal cites a forthcoming (February 2, 2010) book entitled “The Quants“, written by Scott Patterson, who also writes for the Journal.  An excerpt from this book appears on WSJ.com today under the title “The Minds Behind the Meltdown”, with the (provocative and candidly, rather hyperbolic) subtitle: “How a swashbuckling breed of mathematicians and computer scientists nearly destroyed Wall Street”.  Also, here’s a video interview concerning the book excerpt which appeared in today’s Journal:

I would like to offer, as an antidote to Patterson’s article and video, Steven Shreve’s October 2008 Forbes article entitled “Don’t Blame the Quants”.  Steven Shreve is the Orion Hoch Professor of Mathematical Sciences at Carnegie Mellon University, where he has built one of the world’s leading quantitative finance educational programs.  Professor Shreve notes that:

“It is easy … to point an accusing finger at the “quants” on Wall Street, that cadre of mathematics and physics Ph.D.s who crunch numbers in esoteric models. Without the quants, the complicated mortgage-backed securities that fueled the housing bubble and led to the freezing of credit might not have been created…To prevent a recurrence of financial crises, some call for a return to a simpler time, before derivative securities and the quants who analyze them–a time when investors bought stocks and bonds and little else. Such complaints miss the point (italics added for emphasis). When a bridge collapses, no one demands the abolition of civil engineering. One first determines if faulty engineering or shoddy construction caused the collapse. If engineering is to blame, the solution is better–not less–engineering. Furthermore, it would be preposterous to replace the bridge with a slower, less efficient ferry rather than to rebuild the bridge and overcome the obstacle.”

I completely agree with Professor Shreve’s perspective on the role played by “quants” during the financial crisis.  The problem was not with the technology per se.  Rather, the problem involves a combination of poor managerial judgment coupled with perverse managerial incentives.  It is difficult to exercise sound judgment about financial engineering and risk management when top management views risk models as black boxes which exist for the purpose of printing money.

Assorted Links (1/20/2010)

Here’s a list of articles that I have been reading today (organized by topic):

Finance

“It is time institutional investors exerted control over publicly held companies.”

Financial Crisis and Public Policy

“…it’s a formula for turning the banks into what Fannie and Freddie have become: profitless channelers of taxpayer-guaranteed money into whatever loss-making loans politicians happen to want made.”

Foreign Policy

“For Haitians, just about every conceivable aid scheme beyond immediate humanitarian relief will lead to more poverty, more corruption and less institutional capacity.”

Health Care Reform

“How can a little known Republican run a competitive Senate campaign in Massachusetts? The culprit is the unpopularity of health reform, and it means that Democrats will face even worse problems later this year in less liberal places than Massachusetts.”

Public Policy

Harvard Economics Professor Martin Feldstein provides a critical assessment of Obanomics…

“Canada now boasts North America’s freest economy.”

Prediction Markets’ take on the 2010 United States Senate special election in Massachusetts

Intrade.com maintains an actively traded market for futures contracts which pay 100 points (where 1 point = $.10) in the event that a specific contingent event occurs and 0 points otherwise. Thus, prices represent “risk neutral” event probabilities. I have previously blogged about how useful prediction markets can be in assessing political events such as election outcomes (e.g., see Prediction markets assessment of the (2004) Presidential Election and Preliminary assessment of the accuracy of the Intrade State-by-State contracts (for the 2008 Presidential Election)); furthermore, an article entitled “Prediction Markets“ by Justin Wolfers and Eric Zitzewitz, Journal of Economic Perspectives (Vol. 18, No. 2 (Spring 2004), pp. 107-126) provides a particularly informative technical survey concerning prediction markets in general.

Lately, the upcoming (January 19) United States Senate special election in Massachusetts has become particularly interesting because up until the past couple of weeks, the Democratic candidate (Martha Coakley) was heavily favored to defeat the Republican candidate (Scott Brown).  Below, I list the time series graphs for the MA.SPEC.SENATE.DEM and the MA.SPEC.SENATE.REP contracts that are currently trading on intrade.com.  The MA.SPEC.SENATE.DEM contract is a (100,0) bet on Martha Coakley winning this special election, whereas the MA.SPEC.SENATE.REP contract is a (100,0) bet on Scott Brown prevailing.  Both contracts were initially offered on this exchange in September 2009, but only since the beginning of 2010 has there been much interest in trading these contracts.  


MA.SPEC.SENATE.DEM

 
MA.SPEC.SENATE.REP

Lately there has been strong momentum in Brown’s favor, and as I write this, the MA.SPEC.SENATE.REP contract is up 13 points from its previous (1/15) close of 41, whereas the MA.SPEC.SENATE.DEM contract is down 12.5 points from its previous close of 61 (note that that the contract prices can sum to slightly more or less than 100 because trades are non-synchronous).  The price change since earlier this week has been quite dramatic, going from a roughly 80/20 advantage for Coakley to the present situation which indicates a slight advantage probabilistically for Brown.  Anyway, it will be obviously very interesting to see how this election plays out!

Assorted Links (1/14/2010)

Here’s a list of articles that I have been reading today (organized by topic):

Foreign Policy

“Supporters of President Obama’s ‘moral realism’ are unaware of many elements of Reinhold Niebuhr’s political theology.

Health Care Reform

“ObamaCare is still no sure thing.”

“Economists have shown that if a good’s price is zero or decreasing, then the demand for this good will likely increase. In 2008, consumers were only directly responsible for 11.9 percent of total national healthcare expenditures, down from 43 percent in 1965, according to new data from the U.S. Department of Health and Human Services. This means that someone other than consumers pays roughly 88 percent of all healthcare costs, giving consumers little incentive to mind costs and much incentive to over-consume.”

Politics

“He and the public are on different pages, if not in different books.”

“What went wrong? A year ago, he was king of the world. Now President Obama’s approval rating, according to CBS, has dropped to 46 percent — and his disapproval rating is the highest ever recorded by Gallup at the beginning of an (elected) president’s second year.”

Public Policy

“The U.S. economy is sensitive to high energy prices. An aggressive push toward green power would result in the net loss of millions of jobs. There is a better way forward.

    Terrorism

    “In responding to the attempted bombing of an airliner on Christmas Day, Sen. Dianne Feinstein voiced the feelings of many when she said that to prevent such situations, “I’d rather overreact than underreact.” This appears to be the consensus view in Washington, but it is quite wrong. The purpose of terrorism is to provoke an overreaction.”

    Assorted Links (1/11/2010)

    Here’s a list of articles that I have been reading today (organized by topic):

    Finance

    Financial Crisis and Public Policy

    “In his recent speech, the Fed chairman denied that too-low interest rates were responsible. Does this mean we’re headed for a new boom-bust cycle?”

    “A recession is a terrible time to make major changes in the economic rules of the game.”

    Foreign Policy

    “Saying that the U.S. will ‘bear witness’ to brutality around the word is, in effect, to say that we will send flowers to funerals.”

    Music

    “Legendary jazz musician Herbie Hancock delivers a stunning performance alongside two old friends — past drummer for the Headhunters, Harvey Mason, and bassist Marcus Miller. Listen to the end to hear them sweeten the classic “Watermelon Man.””

    Political Economy

    In Argentina, “President Christina Kirchner tries to seize control of the central bank.”

    Terrorism

    In “Crisis and Command,” John Yoo, vilified as the Bush adviser who did the most to trash the Constitution, defends the power of the executive in times of war, arguing that George W. Bush was far more measured and restrained than his predecessors, and more deferential to Congress.”

    Assorted Links (1/4/2010)

    Here’s a list of articles that I have been reading today (organized by topic):

    Economics

    “Economists are often cheapskates.”

    The Economy

    “A recession is a terrible time to make major changes in the economic rules of the game.”

    Financial Crisis

    “How do groups of intelligent, sophisticated bankers, investors, borrowers, entrepreneurs, and traders find themselves caught together in the recurring bubbles and busts?

    Highly Recommended

    “It was a year of Hope — at first in the sense of “I feel hopeful!” and later in the sense of “I hope this year ends soon!””

    Public Policy

    “America’s experiment with banning alcohol created problems that persist to this day.”

    Terrorism

    “President Obama doesn’t need an investigation to figure out how Umar Farouk Abdulmutallab got on a Detroit-bound plane.”

    Assorted Links (1/1/2010)

    Here’s a list of articles that I have been reading today (organized by topic):

    Highly Recommended

    “While so many of our institutions have failed, we can repair them. The first step is to take personal responsibility.”

    • Welcoming 2010, from the Boston Globe’s “Big Picture” blogsite

    “People all around the world gathered in groups large and small last night to usher out the previous year, and welcome the arrival of 2010. Under a rare New Year’s Eve Blue Moon, crowds watched fireworks, cheered, made resolutions, and counted down to midnight. 2010 is the year of the Tiger in the Chinese zodiac, signifying a year of bravery and courage. Collected here are some photographs of people across the earth as they welcomed the new year in many different ways. (38 photos total)”

    Public Policy

    “It would be nice if we reacted to the inevitable failures of centralized agencies with resiliency instead of rabid denunciation and cynicism.”

    The estate tax is now gone, one of the goals of President Bush.  But under current law, it will come back next year.”


    Terrorism

    “Janet Napolitano — former Arizona governor, now overmatched secretary of homeland security — will forever be remembered for having said of the attempt to bring down an airliner over Detroit: “The system worked.” The attacker’s concerned father had warned U.S. authorities about his son’s jihadist tendencies. The would-be bomber paid cash and checked no luggage on a transoceanic flight. He was nonetheless allowed to fly, and would have killed 288 people in the air alone, save for a faulty detonator and quick actions by a few passengers.”