The Volokh Conspiracy - A Response to Orin on Tradesports.--

1. Response to Orin's Response.

Orin wrote that about two hours before his 8:38pm post Roberts futures were trading at 1% and (at 8:38pm) were trading at 99.5%. He concluded: "Looks like Tradesports was right after all — at least after the announcement was made."

In response, I pointed out (1) that at 6:38pm (two hours before his post), Roberts futures were trading at 10%, not 1% (but I noted that they had been trading at 1% at 5:55pm); and (2) that "At 6:48pm (almost two hours before Orin's post and nearly an hour before the final press leak), Roberts became one of the top two favorites for the first time, trading at 30. At 7pm, for the first time, Roberts became the favorite at 41.9%. After remaining one of three favorites for the following 40 minutes, Roberts became the favorite for good at 7:40pm."

Now in response, Orin acknowledges only my first point:

But as best I can tell, the only apparent ground for his characterization is that I said Roberts was trading at 1% "about 2 hours" before my post, when the exact time Roberts was trading at 1% was 2 hours and 45 minutes before my post. But even assuming we construe "about" to exclude a 45-minute error window, what difference does that make?"

The main reason I wrote my update was to point out that Orin was "incorrect or misleading" in that the trading on Tradesports indicated that Roberts had a very substantial likelihood of being the nominee, not only after the press announced that Roberts would be nominated, but before the press announced it.

Orin points out that KJ Lopez had a post at the Corner at 5:24pm predicting Roberts as the nominee. But, of course, hers was one of many posts that predicted one or another nominee (indeed, Lopez herself was pushing Clement earlier in the day, as were traders on Tradesports). Her reasoning on NRO's The Corner and at NRO's Bench Memos was far from compelling. Here is Lopez's 5:24pm post that Orin notes:

Prediction: Bush will nominate a white male tonight. Just because they said he couldn't.

John Roberts. Bill Pryor! John Bolton!! Karl Rove.

I'm serious about one of those guys, by the way (and, no, I'm not being a right-wing lunatic this time, so this one's an easy guess).

Lopez follows this up at NRO's Bench Memos by pointing out that Luttig's family is in Washington. Her colleague at Bench Memos, Jonathan Adler floats Maurren Mahoney and makes a brief case for Edith Jones. Robert Alt on Bench Memos comments on Luttig's presence with his family in Washington.

At 6:14pm, Lopez follows up her prediction of Roberts or another white male by saying:

Did Major Garrett Just Say that he expects it won't be anyone who can be perceived as "an angry white man"? I assume there's no other kind of white male? With every comment like that I become more and more convinced Bush will do the impossible.

Here's my question: Supposedly when O'Connor was chosen everywoman got goosebumps, wanted to hug her...will men have the same reax if John Roberts is the nominee?

So the reasons Lopez actually gives for Roberts are only (1) that Bush will nominate a white male "Just because they said he couldn't" and (2) "With every comment like that [about angry white males] I become more and more convinced Bush will do the impossible."

At 6:17, Lopez says that she is told it's not Luttig. At 6:27, Lopez says that Roberts is in town, but she wonders where Mary Ann Glendon is, saying, "I can dream."

My point in reviewing some of this (and there is more) is that, while in hindsight Lopez was correct, her publicly stated reasons were far from compelling, and even her colleagues at Bench Memos and The Corner were not giving up on other speculations. The advantage of a market is that it can sift through information and assign a value to it.

Markets are good at evaluating publicly traded stocks, not because no analyst is correct in hindsight, but because it is difficult to know a priori which analyst is correct and which isn't.

So Orin asks whether markets such as Tradesports "just mirror the collective common wisdom of newspapers and blogs." Yet aggregating the collective wisdom and putting a probability on it is a very valuable function in itself. Markets should do this better than most experts reading through the blogs and newspapers and trying to figure out whom to trust.

Orin ends by saying:

I suppose this means that you could try to use Tradesports as a way of monitoring what a few newspapers and blogs are saying, but on the whole this seems like a quite modest function. It seems easier to just scan the headlines at How Appealing.

I just scanned the headlines at How Appealing. Before the press's announcement of Roberts as the nominee, there were headlines suggesting that Clement would be the nominee and then one saying she wouldn't. So How Appealing would not have been a way to aggregate opinion on who the nominee would be, except for the time earlier in the day when Clement was the conventional wisdom choice at How Appealing, The Corner, and Tradesports.

2. The Larger Question.

Part of Orin's and my disagreement tonight is that we are talking past each other.

Orin questioned the predictive ability of trading markets. I responded:

markets are frequently wrong; . . . The question is whether experts can usually do a better job than markets. It would seem that the answer is generally No.

Orin responded:

I think the question is whether markets do a good job predicting the discretionary decision of one person, as compared to predicting the collective outcome of the individual decisions of many. I can see markets doing a good job predicting collective decisionmaking, but I don't see the advantage they have in predicting what one person is thinking. Thus, it seems to me that Tradesport users incorrectly predicted Rehnquist would decide to retire because that's what newspapers were incorrectly predicting at the time; ditto for the idea that Clement would be nominated to replace Rehnquist.

My claim is a comparative one. Markets should do a better job than experts who lack actual inside information of the choice for a number of reasons that are raised in the comments to one of Orin's earlier posts. I would think this would be true both for predicting individual decisions and for predicting voting or future big market decisions, though I don't know what the state of the empirical evidence is on this narrower point.

Orin says that "the question is whether markets do a good job predicting the discretionary decision of one person, as compared to predicting the collective outcome of the individual decisions of many." This way of stating the issue potentially conflates two questions:

(1) the relative difficulty of predicting individual v. collective decisions; and
(2) the relative effectiveness of experts v. electronic markets.

For obvious reasons, predicting one person's decision is probably harder than predicting the aggregate decisions of many people, though sometimes that is not true (I suspect that for some Supreme Court decisions, I could better predict how Scalia would vote than how the Court as an aggregate would vote. Similarly, I expect that I could also better predict how Senator Hatch would vote on Bush's next Court of Appeals nominee than how the Senate Judiciary Committee would vote.)

But if all that Orin were claiming is that individual decisions are usually harder than agggregate decisions to predict (by markets or by experts), then I would suspect that this is generally true.

Yet Orin is questioning the effectiveness of trading markets: "the question is whether markets do a good job predicting the discretionary decision of one person, as compared to predicting the collective outcome of the individual decisions of many."

I am claiming that markets (however "good" or bad they are in absolute terms) should be better than experts on balance, or at least better than experts who lack actual first-hand knowledge of the forthcoming decision. So Orin and I may be talking past each other. I am asserting that I would expect a comparative advantage for markets over experts; Orin is questioning whether markets would "do a good job" predicting individual decisions compared to group ones.

	[Jim Lindgren, July 20, 2005 at 3:12am] Trackbacks A Response to Orin on Tradesports.-- 1. Response to Orin's Response. Orin wrote that about two hours before his 8:38pm post Roberts futures were trading at 1% and (at 8:38pm) were trading at 99.5%. He concluded: "Looks like Tradesports was right after all — at least after the announcement was made." In response, I pointed out (1) that at 6:38pm (two hours before his post), Roberts futures were trading at 10%, not 1% (but I noted that they had been trading at 1% at 5:55pm); and (2) that "At 6:48pm (almost two hours before Orin's post and nearly an hour before the final press leak), Roberts became one of the top two favorites for the first time, trading at 30. At 7pm, for the first time, Roberts became the favorite at 41.9%. After remaining one of three favorites for the following 40 minutes, Roberts became the favorite for good at 7:40pm." Now in response, Orin acknowledges only my first point: But as best I can tell, the only apparent ground for his characterization is that I said Roberts was trading at 1% "about 2 hours" before my post, when the exact time Roberts was trading at 1% was 2 hours and 45 minutes before my post. But even assuming we construe "about" to exclude a 45-minute error window, what difference does that make?" The main reason I wrote my update was to point out that Orin was "incorrect or misleading" in that the trading on Tradesports indicated that Roberts had a very substantial likelihood of being the nominee, not only after the press announced that Roberts would be nominated, but before the press announced it. Orin points out that KJ Lopez had a post at the Corner at 5:24pm predicting Roberts as the nominee. But, of course, hers was one of many posts that predicted one or another nominee (indeed, Lopez herself was pushing Clement earlier in the day, as were traders on Tradesports). Her reasoning on NRO's The Corner and at NRO's Bench Memos was far from compelling. Here is Lopez's 5:24pm post that Orin notes: Prediction: Bush will nominate a white male tonight. Just because they said he couldn't. John Roberts. Bill Pryor! John Bolton!! Karl Rove. I'm serious about one of those guys, by the way (and, no, I'm not being a right-wing lunatic this time, so this one's an easy guess). Lopez follows this up at NRO's Bench Memos by pointing out that Luttig's family is in Washington. Her colleague at Bench Memos, Jonathan Adler floats Maurren Mahoney and makes a brief case for Edith Jones. Robert Alt on Bench Memos comments on Luttig's presence with his family in Washington. At 6:14pm, Lopez follows up her prediction of Roberts or another white male by saying: Did Major Garrett Just Say that he expects it won't be anyone who can be perceived as "an angry white man"? I assume there's no other kind of white male? With every comment like that I become more and more convinced Bush will do the impossible. Here's my question: Supposedly when O'Connor was chosen everywoman got goosebumps, wanted to hug her...will men have the same reax if John Roberts is the nominee? So the reasons Lopez actually gives for Roberts are only (1) that Bush will nominate a white male "Just because they said he couldn't" and (2) "With every comment like that [about angry white males] I become more and more convinced Bush will do the impossible." At 6:17, Lopez says that she is told it's not Luttig. At 6:27, Lopez says that Roberts is in town, but she wonders where Mary Ann Glendon is, saying, "I can dream." My point in reviewing some of this (and there is more) is that, while in hindsight Lopez was correct, her publicly stated reasons were far from compelling, and even her colleagues at Bench Memos and The Corner were not giving up on other speculations. The advantage of a market is that it can sift through information and assign a value to it. Markets are good at evaluating publicly traded stocks, not because no analyst is correct in hindsight, but because it is difficult to know a priori which analyst is correct and which isn't. So Orin asks whether markets such as Tradesports "just mirror the collective common wisdom of newspapers and blogs." Yet aggregating the collective wisdom and putting a probability on it is a very valuable function in itself. Markets should do this better than most experts reading through the blogs and newspapers and trying to figure out whom to trust. Orin ends by saying: I suppose this means that you could try to use Tradesports as a way of monitoring what a few newspapers and blogs are saying, but on the whole this seems like a quite modest function. It seems easier to just scan the headlines at How Appealing. I just scanned the headlines at How Appealing. Before the press's announcement of Roberts as the nominee, there were headlines suggesting that Clement would be the nominee and then one saying she wouldn't. So How Appealing would not have been a way to aggregate opinion on who the nominee would be, except for the time earlier in the day when Clement was the conventional wisdom choice at How Appealing, The Corner, and Tradesports. 2. The Larger Question. Part of Orin's and my disagreement tonight is that we are talking past each other. Orin questioned the predictive ability of trading markets. I responded: markets are frequently wrong; . . . The question is whether experts can usually do a better job than markets. It would seem that the answer is generally No. Orin responded: I think the question is whether markets do a good job predicting the discretionary decision of one person, as compared to predicting the collective outcome of the individual decisions of many. I can see markets doing a good job predicting collective decisionmaking, but I don't see the advantage they have in predicting what one person is thinking. Thus, it seems to me that Tradesport users incorrectly predicted Rehnquist would decide to retire because that's what newspapers were incorrectly predicting at the time; ditto for the idea that Clement would be nominated to replace Rehnquist. My claim is a comparative one. Markets should do a better job than experts who lack actual inside information of the choice for a number of reasons that are raised in the comments to one of Orin's earlier posts. I would think this would be true both for predicting individual decisions and for predicting voting or future big market decisions, though I don't know what the state of the empirical evidence is on this narrower point. Orin says that "the question is whether markets do a good job predicting the discretionary decision of one person, as compared to predicting the collective outcome of the individual decisions of many." This way of stating the issue potentially conflates two questions: (1) the relative difficulty of predicting individual v. collective decisions; and (2) the relative effectiveness of experts v. electronic markets. For obvious reasons, predicting one person's decision is probably harder than predicting the aggregate decisions of many people, though sometimes that is not true (I suspect that for some Supreme Court decisions, I could better predict how Scalia would vote than how the Court as an aggregate would vote. Similarly, I expect that I could also better predict how Senator Hatch would vote on Bush's next Court of Appeals nominee than how the Senate Judiciary Committee would vote.) But if all that Orin were claiming is that individual decisions are usually harder than agggregate decisions to predict (by markets or by experts), then I would suspect that this is generally true. Yet Orin is questioning the effectiveness of trading markets: "the question is whether markets do a good job predicting the discretionary decision of one person, as compared to predicting the collective outcome of the individual decisions of many." I am claiming that markets (however "good" or bad they are in absolute terms) should be better than experts on balance, or at least better than experts who lack actual first-hand knowledge of the forthcoming decision. So Orin and I may be talking past each other. I am asserting that I would expect a comparative advantage for markets over experts; Orin is questioning whether markets would "do a good job" predicting individual decisions compared to group ones.