The question, though, of how one individual’s belief—that IBM’s stock will rise or that a Bush will be elected—gets combined with those of every other trader and then translated into a price that is an accurate predictor continues to provoke heated debates in the research community. Economic theoreticians have yet to understand precisely why this novel means of forecasting elections should work better than well-tested social science methods.
On close inspection, the characteristics of IEM traders would drive a statistician batty. Early on it became clear that the traders are by no means a representative sampling of the population at large, the prerequisite for any poll. And a survey of them in the 2004 presidential election market underscored the point: most were found to be well educated, affluent, white, male Republicans who tended to have a high opinion of their own political insight into the face-off between Bush and Kerry, a grouping that does not fit the definition of a well-designed sample. In about one in five transactions, traders had no personal opinions or beliefs at all about the Swift Boat smear campaign or prisoners being held in Guantánamo. Rather those buying or selling were “robots”—automated trading programs that buy and sell when the software perceives that a security is too high or low. Automated programs routinely execute trades on Wall Street. And IEM election market researchers are still plumbing what a machine’s trading patterns add to the market’s ability to deduce the outcome of an election.
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4 Comments
Add CommentKilling the Darpa project was just stupid. Sorry, Barbara, I like you, but that was equivalent to saying that study of human disease is sick.
Reply | Report Abuse | Link to thisThe true horror of DARPA is as follows: Those who are ill informed would loss money. This would likely inspire them to seek more accurate information in order to recoup their losses; by seek more factual news sources they would acquire a more realistic world view. Receiving financial rewards for being well versed in world affairs would lead to a politically active citizenry who would hold their representatives accountable for their in/actions. Cable news networks would be bankrupted, politicians would live to serve their constituents, and pigs would grow wings. Luckily those in office killed DARPA thus preventing a repeat of the Swine Flu Massacre of the 70s.
Reply | Report Abuse | Link to thisOne question come to mind: what would be the outcome of predictions from polls if polling samples were representative of market traders?
Reply | Report Abuse | Link to thisI visited the IEM offices at the U of Iowa soon after the DARPA hullabaloo. The professor there (who I don't remember) made an important point. Namely, that the members of the market join the market based on their specialized knowledge of that market. For the DARPA scenario, then, people making the market would have some knowledge about the terrorist detection process. (Obviously, terrorists would probably not join for fear of giving away their identities--even though they would be excellent candidates. However, recall that *someone* shorted stocks on the afflicted 9/11 airlines--we still haven't heard *who*. Why? THAT was a market move!)
Reply | Report Abuse | Link to thisThe whole point, I heard in that IEM office, was to tap into knowledge that might give one person special insight into "the system"--such that the special knowledge would be reflected in "the market". It's simple. It makes sense. But the press totally failed to report that members of the market must have knowledge of the market. Pot shot plays on the market mean zilch, thus, exclude them. The press failed us all on this one. The 4th estate needs help not only on this issue, but on a lot of topics.
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Edited by johnsorflaten at 03/04/2008 1:58 PM
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Edited by johnsorflaten at 03/04/2008 2:05 PM