The Politimetrics provides implied probabilities of Clinton or Obama winning in November if they get the nomination, derived from Intrade prices. I’m surprised that it’s been showing recently that the difference in their electabilities has been mostly zero, with occasional indications that Clinton is slightly more electable. Most other sources of information appear to suggest that Obama has more support than Clinton among independents and Republicans.
I just did a little trading to help move the market toward showing Obama as more electable by replacing my small bet against Clinton being nominated with a bet against her becoming president, but the amount I’m willing to trade was small enough that the markets moved in the opposite direction (i.e. showed increased Clinton electability).
What could cause the markets to indicate knowledge that conflicts with what I expect?
It could be that several limitations of Intrade impair market efficiency, such as not making it easy to see what those of us who have noticed the Politimetrics site see, or having margin requirements that are not conducive to exploiting inefficiencies of this nature (even if I were more confident that the market is wrong, the expected return on investment isn’t enough to persuade me to make large trades).
It could be that Obama is sufficiently unusual that there’s more uncertainty in how he will do, so that while the most likely result is that he’d get more votes than Clinton would, there’s a greater chance of a negative surprise with him.
It could be that Clinton is expected to be sufficiently vicious if she’s losing that she would hurt Obama before giving up.
But the history shown on the Politimetrics site has swings that seem unexplained by these guesses.
Politics
Book review: Poverty and Discrimination by Kevin Lang.
This book is designed to make you feel less sure of your knowledge, and it succeeds in that goal. That’s a worthy accomplishment, although it provides much less satisfaction than a book that provides a grand vision for solving problems would. At some abstract intellectual level I liked the book, but my gut feelings often told me that reading the book was unrewarding work that I shouldn’t do unless it was assigned reading for a course I needed.
The book will dissatisfy anyone who wants to view politics as a fight between good and evil. For many issues such as the minimum wage, he provides strong arguments that the effects are small enough that we should doubt whether the issue is worth fighting about.
He gives good explanations of why it’s hard to even have clear concepts of poverty and discrimination by providing examples of how seemingly trivial or unobservable differences can create results that our intuitions say are important to our moral rules.
He provides clear evidence that some discrimination still exists, and then thoroughly explains why there’s large uncertainty about how harmful it is. He presents one moderately unrealistic model in which discrimination is common but doesn’t affect wages. Then he presents a somewhat more realistic model in which a tiny bit of discrimination produces large wage differences. But those wage differences may overstate the harm done, because they’re partly due to minorities spending less on education and to women pursuing careers in lower risk occupations or careers which allow more flexibility to take time off.
There are only a handful of places where I doubted his objectivity.
He reports one study showing evidence of racial discrimination in home loans, but fails to mention any of the contrary evidence such as the Anderson and Vanderhoff paper showing higher marginal default rates for blacks.
The final few pages on policy implications seem poorly thought out compared to the rest of the book (he says that’s the least important chapter of the book). He claims that income taxes on the bottom quintile can be reduced to zero by a 10% increase on the top quintile, but that claim depends on assumptions about how reported income changes in response to tax increases. He doesn’t indicate what assumptions his claim depends on.
He claims “The high rate of incarceration in the United States and the high level of inequality are related.” He gives a plausible theory about why inequality causes the wealthy in some countries to spend a lot protecting their wealth from the poor, but provides no evidence connecting that theory to U.S. incarceration rates.
Early this week, the Federal Reserve Board lowered interest rates at an unexpected time by a surprisingly large amount.
I see three possible explanations, which I think are about equally likely.
- The Fed has evidence that the economy is slowing more than markets have realized.
- The Fed has evidence that some big financial institutions have troubles that are endangering the careers of some influential people, and is bailing out those institutions in hopes that those people will use their influence to enhance the job security of the people in charge of the Fed.
- Bernanke isn’t interested in the kind of publicity he can get by maximizing the total number of rate cuts. He realizes that a steady, predictable series of small rate cuts doesn’t stimulate the economy as well as cutting rates far enough that it isn’t easy to predict that more rate cuts will be needed (for one thing, making further rate cuts predictable creates incentives to postpone borrowing to when rates are lower). If that’s what’s happening, it’s not going to work as well as he would like this time, because the markets think the Fed is following the predictable rate cut strategy that gives them publicity for doing something at the time that the average person is most concerned about recession.
In related news, Singapore has a system which is designed to stabilize the economy rather than to provide politicians with opportunities to claim credit for doing something about the economy.
China is imposing widespread price controls and suffering power shortages which hinder production. If China were like the U.S., I’d say it’s trying to recreate the experience the U.S. had in the early 1970s. But the way Chinese politics work, the central government probably will allow local authorities to use a lot of discretion in enforcing the price controls, so the price controls will probably only produce shortages in a few industries that are dominated by large state-owned firms.
Politimetrics (associated with the Westminster Business School) has sponsored some additional Intrade contracts which will provide information about the impact of the presidential election on the country if they ever get enough liquidity. So far, there’s been no sign that much liquidity will exist.
One reason I (and presumably other traders) haven’t placed many orders is that the contracts deal with individual candidates. Since the value of the new contracts should fluctuate with the probability of the relevant candidate’s winning, and those fluctuations are currently much larger than any other factor affecting the prices, trading them would require any trader who doesn’t accept the market price to frequently monitor the prices of the underlying contracts. Nobody wants to do that unless the contracts already have significant volume.
Even if they had some liquidity, there’s a good deal of risk that the long-shot bias which appears to be common on Intrade would limit my confidence in the value of the information provided by those prices for all but the two or three candidates who are most likely to win in November (i.e. I’d probably believe what they said about Clinton relative to Obama, but I’d doubt they would be useful for voters in Republican primaries).
When it becomes clear who will win each party’s nomination, these problems will be reduced, and I’ll probably place a moderate number of orders on some of these contracts.
It should be possible to design a better user interface for decision markets of this nature so that users could place orders purely on the probable impact of a candidate’s election. Shock response futures come closer to doing that than contracts of the form “X wins and Y happens”, but can probably only indicate the direction of the impact.
I’ve created web pages at https://bayesianinvestor.com/amm/implied.html and https://bayesianinvestor.com/amm/implied4.html (which are currently being updated 4 times a day) which show implied prices (i.e. the price of the conditional contract as a percent of the price of the underlying candidate’s contract) that ought to represent what the markets think the probable effects would be if that candidate wins. Ideally traders could place orders expressed in terms of those implied prices, but that’s nontrivial to implement, and unlikely to happen unless someone pays Intrade a fair amount to create.
I’ve commented on Jed Christiansen’s blog about why I doubt the conditional contracts I’m subsidizing have had enough trading yet to produce valuable information. But the trends suggest there will be enough trading within a few weeks.
I have implemented subsidies to encourage trading of some conditional prediction market contracts that may provide useful information about the consequences of the 2008 presidential election, via a simple automated market maker (using an algorithm described near the end of http://hanson.gmu.edu/ifextropy.html). The subsidized market maker ought to provide incentives for traders to devote more thought to these contracts than they would if the liquidity was less predictable.
Intrade has agreed not to charge any trading or expiry fees on these contracts.
Some places to look for extensive description of the motivations behind these subsidies are here and here.
The contracts are:
-
Oil Futures and PRESIDENT.DEM2008 prices will move in same direction on Election Day
This will use the change in the December 2011 Light Sweet Crude Oil futures
contract from the close before the election (Monday) to the close after the election (Wednesday). A price higher than 50 should suggest that a Democratic victory will cause oil prices to be higher than they otherwise would be, while a price below 50 should suggest that a Democratic victory will cause lower oil prices.
PRESIDENT.DEM2008 refers to the Intrade contract for "Democratic Party Candidate to Win 2008 Presidential Election". -
Treasury bond interest rate futures and PRESIDENT.DEM2008 prices will move in same direction on Election Day
This will use the change in the December 2008 30-year US Treasury Bond futures contract from the close before the election (Monday) to the close after the election (Wednesday). A price higher than 50 should suggest that a Democratic victory will cause bond prices to be higher (and long term interest rates lower) than they otherwise would be, while a price below 50 should suggest that a Democratic victory will cause lower bond prices (and long term interest rates higher) . - Number of US troops in Iraq on 30 June 2010 if a Democrat is elected president in 2008
- NONDEM.PRES-TROOPS.IRAQ: Number of US troops in Iraq on 30 June 2010 if a non-Democrat is elected president in 2008
These are scaled claims whose value will range from 0 if the troop levels are zero to 100 if the troop levels are 200,000 (or more).
- Increase in US Government debt if Democrat elected president in 2008
- Increase in US Government debt if non-Democrat is elected president in 2008
Note that the change in debt is usually quite different from what
is reported as the budget deficit. The debt numbers will be taken from a
source such as the
St. Louis Fed
Series GFDEBTN, Federal Government Debt
These are scaled claims whose value will range from 0 if the debt does not increase to 100 if the debt increases by $1 trillion (or more).
Please read the detailed specifications at Intrade before trading them, as one-line descriptions are not sufficient for you to fully understand them.
For the first two of those contracts, the market maker will enter bids and asks of 38 contracts, and can lose a maximum of $5187.76 on each contract. For the other four contracts, the market maker will enter bids and asks of 115 contracts, and can lose a maximum of $7906.25 on each contract.
I will maintain a web page here devoted to these contracts.
See also this more eloquent description on Overcoming Bias.
Book review: The Execution Channel by Ken MacLeod.
The style of this book is better than that of the other books I’ve read by MacLeod, but not good enough for the style alone to be sufficient reason to read it.
I was disappointed that the substance was not very thought provoking. Unlike the typical MacLeod novel, it is set in a society too similar to ours to stretch our imaginations much, and sufficiently less pleasant to be somewhat depressing.
Much of the book is commentary on the current “war on terror”. I agree with a lot of that commentary, but only a few aspects of the commentary have much value.
The most important way in which this novel stands out is that it portrays most characters as people who expect to be the kind of leaders that conspiracy theorists imagine the world to be run by, but regularly end up as more realistic people whose battle plans don’t survive contact with the apparent enemy. And there’s a good deal of realistic “fog of war” type uncertainty over who the enemy is.
MacLeod deserves a good deal of credit for avoiding a number of biases that make typical novels popular but unrealistic, such as making the protagonists better than human. Unfortunately, the results confirm that this kind of realism interferes with the enjoyability of novels.
Book review: Cool It: The Skeptical Environmentalist’s Guide to Global Warming by Bjørn Lomborg.
This book eloquently counters many popular myths about how much harm global warming is likely to cause, but is sufficiently partisan and one-sided that it will do more to polarize the debate than to resolve disagreements. Many of his criticisms of the alarmists are correct. Reading this book in combination with writings of his opponents will give you a much better perspective than reading only one side of this debate.
Selective reporting gives the impression that global warming is causing more deaths, but Lomborg reports that warming will cause reduced deaths for the foreseeable future, mainly through reduced cold-related cardiovascular deaths. He claims warming won’t cause a net increase in deaths until at least 2200, but I expect that uncertainty about medical innovation makes predictions more than a few decades ahead not credible. Even for the next few decades, he exaggerates the evidence. What he calls “The first complete survey for the world” covers the entire world, but only tries to model the effects of the 6 types of disease for which global information is available, and its authors clearly deny knowing whether other diseases have important effects. Lomborg claims there will be 1.4 million fewer deaths in 2050 due to global warming, but he seems to get that number from the effects of only two disease types, whereas the paper he cites predicts 849252 fewer deaths from 6 disease types.
He is often too dismissive of the possibility of technological improvements. For instance, he claims that sticking to Kyoto commitments through the 21st century “would get ever harder”, yet I can imagine a variety of ways it could get easier. He mentions specific dollar costs for complying with Kyoto for a century without hinting at the large uncertainties in those guesses.
In one place he analyzes Kyoto as if it were a foreign aid program, and says that it would do 16 cents of good in developing countries for every dollar spent. I assume he considers this an argument against Kyoto. Since 16 cents might help a person in a developing country more than a dollar helps a person in a developed country, and there is some reason to suspect that few large aid programs are more than 16 percent efficient, it could easily be considered a weak argument for Kyoto.
Sometimes he’s blatantly careless, such as when he talks about “reducing [hurricane] damage by almost 500 percent”.
He appropriately criticizes the Stern report’s use of a suspiciously low discount rate (which has major implications for how much we should do now), but he doesn’t provide a clear explanation of that issue, nor does he say what his preferred model uses (a review on Salon says it uses a 6 percent discount rate, which I suspect only makes sense if we assume a higher economic growth rate than most experts expect).
While there is much debate about whether we should respond to global warming by taxing CO2 emissions at $2 per ton or $140 per ton, there are countries with policies that are roughly equivalent to rewarding CO2 emissions at levels that appear to exceed $100 per ton.
I’m referring to gasoline pricing rules that keep gas prices at the local consumer level way below the global market price. Venezuela is a dramatic example, China has prices that are modestly below the market price, but that applies to an important fraction of the world’s gas use, and last I heard Iran and Iraq were practically giving away whatever gas became available to their consumers (it’s sad that Iraq was invaded by a government that didn’t think freer markets would help Iraq). These policies would be wasteful even if CO2 emissions were good (e.g. due to causing long lines to get gas).
Even if those low prices are implemented in a way that helps the poor in those countries, it causes nontrivial increases in gas demand which drive up gas prices in the rest of the world (at least in the short run; the long run price changes depend on the cost of finding new oil).
People who care enough about global warming to make modest efforts to slow it should put pressure on these countries to charge market prices for gas. In addition to traditional techniques, one obvious response is to exploit the inherent instability of these price differentials by giving as much aid and protection as is practical to the heroic businessmen who smuggle gas from low price regions to regions where marker prices prevail. If governments of Europe and the U.S. cared enough about global warming, they could probably enable enough smuggling to measurably reduce the waste of gas in many smaller countries. But that would probably still leave significant waste in China, and I’m not sure what can be done about that.
Bernie Sanders has introduced a bill to replace patent monopoly protection for drugs with awards based in part on Quality Adjusted Life Years added by the drugs.
This would eliminate the harm due to monopoly pricing. It might also cause some research to be redirected from “me-too” drugs to more innovative drugs. But I suspect that it’s common enough for what initially looks like a “me-too” drug to end up having valuable advantages that such an effect will be minor.
It would probably be a bigger help to people in developing nations than all the government spending misleadingly labeled as foreign aid.
Because politics will ensure that the idea is implemented suboptimally, I would prefer that something similar (e.g. patent buyouts) be implemented by a more responsible institution such as the Gates Foundation. But the patent system has enough problems that even this imperfectly written bill might improve on the status quo.
One strange effect of political reality is that the rewards are apportioned according to either benefits to U.S. patients or world patients, and the bill provides an awfully vague description of which rule will apply to which drug.
The bill allocates 10% of the rewards to orphan drugs, presumably because the lives of people with those diseases are worth more than those with common diseases.
The bill claims generics cost 85% less than patented drugs, but gets that figure from comparing overall generic prices with overall patented prices. If the cost of manufacturing drugs differs for old and new drugs, that will be misleading. The estimates I’ve found for same-drug price declines after generic competition starts suggest the price decline is more like 30% to 50%. So the bill’s claim that it can be financed by the reduced Federal government drug spending appear to be fiction.
Besides, if it were self-financing that way, wouldn’t it indicate a big reduction in the rewards to drug development? I want to see a good analysis of why $80 billion a year is adequate to substitute for patent exclusivity. My crude attempts at analyzing it suggests it’s too low, but not by a large amount.
(HT Alex Tabarrok)
Up to two months ago, I was not too excited by the claims of a bubble in the Chinese stock market. Maybe the stocks that trade only in China were at bubble levels, but the ones that trade in the U.S. or Hong Kong still looked like mostly good investments.
Much has changed since then. On October 17, PetroChina rose 14.5%, more than doubling in about two months. That was a one day gain in market capitalization of almost $60 billion, and a two month gain of $247 billion (doubling the market capitalization). I’ve seen similar but less dramatic rises in smaller Chinese stocks that trade in the U.S., but less on the Hong Kong stock exchange.
By comparison, the largest rises in market capitalization that I’ve been able to find in the technology stock bubble of 1999-2000 were a $50 billion one day rise in Microsoft on December 15, 1999, and a $250 billion rise (doubling) in Cisco which took four months.
I’m not saying that Chinese stocks are clearly overvalued yet, and I’m still holding some stocks in smaller Chinese companies that I don’t feel much urgency about selling. But the unusually strong and long lasting Chinese economic expansion, combined with the unusually frothy action in the stock market, are what I’d expect to be causes and symptoms of a bubble.
Bubbles in the U.S. have peaked when real interest rates rise to higher than normal levels. The Chinese government is keeping real interest rates near zero, and seems to think it can keep nominal interest rates stable and reduce inflation. That would be an unusual accomplishment under most circumstances. When combined with a stock market bubble, I suspect it could only be accomplished with drastic restrictions on economic activity, which would involve instabilities that the Chinese government has been trying to avoid by stabilizing things such as interest rates.
Without a rise in interest rates or drastic restrictions of some sort, it’s hard to see what will stop the rise in Chinese stocks. So I’m guessing we’ll see a bigger bubble than the U.S. has experienced. It’s effects will likely extend well beyond China.