Archive for January, 2008

The Fed’s Surprise

Friday, January 25th, 2008

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.

Posted in Economics, Investing, U.S. Politics | No Comments »

More on Presidential Decision Markets

Friday, January 18th, 2008

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 http://www.bayesianinvestor.com/amm/implied.html and http://www.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.

Posted in Idea Futures, U.S. Politics | 6 Comments »

The First Word

Monday, January 14th, 2008

Book review: The First Word: The Search for the Origins of Language by Christine Kenneally
This book contains a few good ideas, but spends more time than I want discussing the personalities and politics that have been involved in the field.
It presents some good arguments against the “big bang” theory of the origin of human language (which suggests that one mutation may have created syntactic abilities that don’t correspond to anything in other species), mainly by presenting evidence that human language is not a monolithic feature, and that most aspects of it resemble features which can be seen in other species. For example, some of our syntactic ability involves reusing parts of the brain that provide motor control.
I’m uncertain whether the “big bang” theory she argues against is actually believed by any serious scholar, because those who may have advocated it haven’t articulated much of a theory (partly because they think there’s too little evidence to say much about the origin of language).
The most valuable idea I got from the book was the possibility that the development of human language may have been a byproduct of a sophisticated theory of mind. Other apes seem to get less benefit from communications because with only the limited theory of mind that a typical chimp has, there’s little that improved communication by one individual can do to increase cooperation between individuals.

Posted in Book Reviews, The Human Mind | No Comments »

Subsidized Intrade Contracts Conditional on Presidential Election

Friday, January 4th, 2008

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:

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.

Posted in Idea Futures, U.S. Politics | 2 Comments »