Yes, markets are irrational

I'm now convinced. Financial markets are inefficient. What's made me realize this isn't the credit crunch, subprime crisis or Northern Rock. It's more important than that - the betting on Charlotte Church's baby's name.
The thing is, the names of her baby - Ruby Megan - featured nowhere on Paddy Power's long market of names.  This represents a failure of prediction markets.
What's more, the failure is the result of a clear cognitive bias.
The favourite names among bettors show a strong bias. It's towards names associated with Charlotte and Gavin - Maria as in Ave, lots of Welsh names and rugby players. And it's underweight  in popular names generally. 
This is a failure of Bayesianism. It's the base rate fallacy. People over-rated specific knowledge (what might Charlotte and Gavin call their baby?) and under-rated background probabilities; what do young people generally call babies?
Had the betting been based merely on background probabilities, Ruby would have been fourth favourite. That it was nowhere near proves the irrationality of markets.
Eugene Fama was wrong.

Comments

[Peter Risdon]

inefficient != irrational

You've demonstrated a lack of perfect efficiency (which isn't uncommon). Now show something else that might be better. In the absence of this, the market could be said to be the best available mechanism - the least inefficient.

[john b]

He's already cited something that would've been better - using the government's baby name statistics.

http://www.statistics.gov.uk/cci/nugget.asp?id=184

[Robin Hanson]

You think the price is wrong? Get paid to fix it - bet against the names you think overrated.

[john b]

Similarly, spread-betting against the Tories is a sure-fire money-winner, for reasons that may or may not be obvious.