I had to chuckle when I read the following on Bloomberg yesterday:
Paddy Power Plc said it was left “red-faced” after paying out early to gamblers who incorrectly bet that Greek voters would back an austerity referendum. Ireland’s biggest bookmaker “paid out five figures” in winnings on July 1, days before Greece rejected further austerity, with a larger-than-forecast 61 percent of the vote for the “no” campaign. - Paddy Power Left ‘Red Faced’ After Early Payout on Greek Vote
The delicious irony of a prediction market making an early payment on an incorrect prediction of a political referendum was simply too wonderful to pass up without comment. So today’s column is on why predictions markets fail, and that contrary to common beliefs, the crowd often has surprisingly little wisdom.
The “wisdom of crowds” is a colloquial way of describing the market as a complex system. The work on wisdom of crowds shows that when certain conditions are met — diversity, aggregation, and incentives — markets tend to be efficient. Conversely, when one or more of those conditions are violated, markets can and do become inefficient, i.e., price is no longer an unbiased reflection of value. - Michael Mauboussin (emphasis added)
Wisdom, “having the quality of having experience, knowledge, and good judgment,” hardly describes the random, chaotic behavior of markets in general, but especially does not describe prediction or betting markets.
Before we get into the details, a preface: Markets are by definition a crowd.
Continues here: The ‘Wisdom of Crowds’ Is Not That Wise
My Two-fer-Tuesday morning train reads: • Yanis Varoufakis: Angela Merkel has a red and a yellow button. One ends the crisis. Which does she push? (Guardian) see also How Greece leaving the euro would actually work (Vox) • Forget Bitcoin — What Is the Blockchain and Why Should You Care? (Re/Code) but see Bitcoin being forked? (FT Alphaville) • Luxury Brands Have…Read More
Category: Financial Press
What do Greece, Ireland and the U.S.have in common? Each experienced what was termed at the time a “new financial era” that produced an enormous expansion of its finance sector. This led to an intoxicating combination of aggressive lending, leverage and recklessness. In each case, the era ended in a financial crisis; perhaps most important,…Read More
Welcome back to the monkey house. Here are our post-referendum morning train reads: • How ‘vision’ messed up Europe (FT) but see Europeans tried to block IMF debt report on Greece (Reuters) • Don’t Let The Disappointing June Jobs Report Distract From The Long-Term Trend (fivethirtyeight) • Traders’ hormones’ may destabilize financial markets (Science Daily) see also Raging Bull Markets: How Young Men’s…Read More
Category: Financial Press