When markets fail

It's been a bad week for prediction markets. First, the Nobel prize in economics goes to three guys who weren't in the betting. And then outsider Anne Enright wins  the Man Booker prize.
The wisdom of crowds is 2-0 down.
Does this mean prediction markets are over-hyped?
No. It just shows their limits. Markets work best when there's lots of dispersed information to aggregate - about, say, the state of the economy, election outcomes or the success of films. This paper provides some evidence.
But in these two cases, there was no such dispersed information. The decisions were taken by a tiny number of jury members  who gave no signals about their intentions.  Local knowledge - "Gordon Tullock's a great economist", "On Chesil Beach is selling well" -  was no help.
Crowds know lots, and should be used more. But they don't, and can't, know everything.

Comments

[aje]

I agree that it's more important to stress the knowledge problem than the incentive problem, but I think both the Nobel and Booker prize stand apart from many other prediction markets in that the results don't really matter...compared to other instances where juries sit - such as the MPC, which seems to be more accurately predicted (to the extent that action is dependent upon those predictions)

[dearieme]

Don't really matter? You think that economists are indifferent to steaming piles of cash?

[Matthew]

In elections, the 'wisdom of crowds' appears to be the opinion polls plus a little bit of local knowledge. Without the opinion polls they'd be nowhere, whereas the opinion polls would do fine without the betting markets. This perhaps, is simply stating the obvious, but some people appear to go from the concept that betting markets can refine other sources of information, to the idea that they are the single most important source of information, which is clearly silly.

[pommygranate]

Indeed. This is why managers of large stock portfolios, currency traders and commodity trader add no value. It reall is all in the price.

However, managers of small cap funds with only two or three research houses covering the name... that's when you pays your money.

[reason]

Any prediction of uncertain events can be wrong, whether it is made by a crowd or an expert. Anecdote is not data.

[ajay]

First, the Nobel prize in economics goes to three guys who weren't in the betting.

Wrong. They were in the betting. If you'd wanted to bet on them, you should have bet on "field" (which the markets correctly said was the most likely). It's not up to the crowds which contracts are traded - that's up to the bookies. The bookies were wrong, but the crowds were right...

[dsquared]

they got Gore's Peace prize pretty spot on though.