There’s an interesting collection of links and data points over at Chris. F. Masse’s blog, looking at the most memorable moments in the field of prediction markets in ’04.
Readers of this blog know that I find most of these exchanges to be of little predictive value; There are simply too many examples where they are wrong, and by quite large margins, to place much faith in their prescience.
I come in for some razzing for my own views of inefficient markets.
As the 2004 Presidential election futures contracts revealed, traders of political futures followed the polls rather than led them. Indeed, on Election day, futures traders incorrectly surmised a Bush defeat due to early exit polling data. Bush contracts dove to 27 cents, while Kerry’s skyrocketed.
I’m not familiar with Masse’s politics, but he seems to have given a surprsing amount of weight to the Don Luskin theory that George Soros was manipulating political futures contracts. How is it that some purchases are purchases, while others are manipulations never gets satisfactorily addressed, but that is irrelevant, as I am unaware of any conclusive evidence that Soros ever made any future trades.
While we’re on the subject of paranoid flavored ravings, I note that several other commentators also feared that Soros was going to 1) crash the dollar; 2) crash the stock market; or 3) spike oil prices — or other nefarious acts pre-election.
I surmise it was political insurance in case their man lost.
The great irony of this discussion is that part of the reason I have such low expectations for political futures is due to Soros’ theory of Reflexivity — that markets themselves can affect the fundamentals of the economy:
"The generally accepted theory is that financial markets tend towards equilibrium, and on the whole, discount the future correctly. I operate using a different theory, according to which financial markets cannot possibly discount the future correctly because they do not merely discount the future; they help to shape it. In certain circumstances, financial markets can affect the so-called fundamentals which they are supposed to reflect. When that happens, markets enter into a state of dynamic disequilibrium and behave quite differently from what would be considered normal by the theory of efficient markets. Such boom/bust sequences do not arise very often, but when they do, they can be very disruptive, exactly because they affect the fundamentals of the economy.”
I find Soros’ thesis quite compelling; Its consistent with my own critiques of the efficient market hypothesis, as well as the political futures exchanges. (Remember Dean in Iowa).
As to the hubris-filled chest-pounding over at Chris. F. Masse’s blog, consider the following: I expect to wrong in every single prediction, trade and investment I ever make. No, its not a function of poor esteem or lack of confidence; rather, its a way to ensure that stop loses are strictly adhered to. The less ego a trader wraps up into any one position, the easier it is to follow the discipline and get out of Dodge when required. Expecting to be wrong at the onset removes the emotion from the sell. Its part of a bigger plan. Mr. Market demands humility from his participants — get some, or be humbled the hard way.
I see none of that lack of arrogance amongst the prediction
markets crowd. Such is life in academia, where you can backtest to you heart’s delight, rather than step onto the field of battle.
Theorize this! One of these days, I may have to issue a challenge to these weenies — real money, real trading, real gains and losses. I’d be curious if they would be willing to step it up . . .
Hello Barry,
My politics is that I’m an independent right-leaning libertarian, who would have voted for a Mass. liberal in order to counter the neocons. (Thank God the French don’t pick the US president.)
When it comes to Donald Luskin’s Soros hypothesis, it’s the best idea available as for now. You are free to come up with a better proposition.
We may never know the answer unless someone breaks in the TradeSports/InTrade computer system. Anyone tempted?
Good continuation for your interesting blog,
Chris. F. Masse
“Expecting to be wrong at the onset removes the emotion from the sell.”
That was the smartest thing I’ve ever heard you say. Its all about the psychology, and you nailed it. Thanks.
Seems like extremists on both ends of the political spectrum have an affinity for bizarre conspiracy theories that make little sense to the rest of the world.
I recall when Mr. Luskin was tossed from Jim Cramer’s website, I was at first pretty annoyed over his treatment, especially comments that Cramer posted which were clearly about Luskin and his poor performance in giving market advice. I contacted a couple of the site’s other writers, who I always thought were reasonable and fair in their postings, and was advised diplomatically that behind-the-scenes events clearly justified Luskin’s dismissal.
I don’t know any of the people involved here or at Cramer’s site personally, so I have no idea what really happened. I did continue to read Luskin on his own website for awhile, until I ascertained that not only did he often seem to be mistaken about the markets, to my eye, but that his politics seemed to be a rather strange mix of fairly heartless libertarianism and a touch of LaRouche paranoia. This is just my opinion, so take it with a grain of salt. I’m just a ‘nobody’ and all I have is my gut to guide me. And to me, a lot of the right wing seems to fit that description as well as Luskin does. (As to his market analysis, he may well have actually numbers that prove me wrong. As I say, these are only my impressions.)
It does look like he’s found a suitable cyberhome of sorts, so I hope he and his compatriots are happy–or as close to happy as such folks are able to get.
Hello dark 1 p,
Your financial and political comment is interesting, but it has nothing to do with the reason Barry and I were blogging about Donald Luskin. I pretend that Donald Luskin’s hypothesis about Soros being behind the politically motivated attacks on the 2004 Bush futures is today’s best attempt that we have at explaining what happened. Barry does not agree, but offers no alternative hypothesis. Let’s see whether this hypothesis stands the test of time.
Now, when it comes to James J. Cramer, he is a controversial figure and I take everything he says with a grain of Breton salt.
CNBC Larry Kudlow is enamored of Donald Luskin. He invites him on his show and links to his blog. That’s enough for me to consider Donald Luskin as a member of the Wall Street Club.
http://lkmp.blogspot.com/
“CNBC Larry Kudlow is enamored of Donald Luskin. He invites him on his show and links to his blog. That’s enough for me to consider Donald Luskin as a member of the Wall Street Club.”
Could be the Wall Street Club.
But, considering Kudlow, it could just as easily be the partisan Republican political club. Or the K-Street Lobbying club. Meaning, Luskin could be getting links and airtime due to his politics and ideology, rather than to his credibility in financial matters.
Hello Jon H,
You’ve got a good point for Kudlow linking to Luskin. But Donald Luskin’s specialty is the cross-fertilization between politics and finance (in a nutshell, how political perspectives affect the Dow Jones). He calls that macrolytics. And when Larry Kudlow puts him on his show, along side Holland for evenhandedness sake, it’s in order to get this mixed bag of political and financial viewpoints.
How come you guys make me the spokesperson of this neocon.
Chris,
I see.
Personally, I class Luskin with that guy who is occasionally on CNBC, who uses astrology in his investment strategy.
When it comes to Donald Luskin’s Soros hypothesis, it’s the best idea available as for now. You are free to come up with a better proposition
Here’s a better proposition: “That person or persons unknown manipulated the political futures contracts”. This is better because it is also consistent with the evidence, but it does not make unprovable accusations against specific people.
If I found a dead cat outside my front door, would that be a good reason to say “Aha! George Soros killed this cat!”. If someone then said to me “You have no evidence that it was Soros who killed this cat”, would I be able to say “Well, you haven’t come up with a better theory so for the time being I think Soros killed this cat”.
By the way, I don’t understand why you’re singling out NewFutures; both Tradesports and IEM also predicted a Kerry win as of the morning of election day.
To Jon H:
I share your skepticism on some financial analysts. But you’re unfair to Donald Luskin. For example, one day, he came up with a composite graph, made of the Dow Jones pasted over the Bush futures, and the two graphs would match. That was an interesting remark. I’m not saying he’s a luminary commentator, but he’s doing his homework while some others are taking a nap.
—
To D Squared:
#1. It would cost no money to kill a cat. But to manipulate the Bush futures, you need the motivation and the big bucks. Donald Luskin made an interesting hypothesis. He should be commanded for that. I did. I think you’re unfair to him because he’s a neocon. People should be judged on merit only.
(Hey, I’m a “cheese-eater surrender monkey”, but I put that out the equation. We’re not talking about politics, we’re talking about prediction markets, an issue that Barry L. Ritholtz blogged about at the top of this webpage, remember?)
Now, an hypothesis holds until a better comes up, or when the truth is finally revealed. Let’s send a truth squad in Ireland! Who wants in?
#2. I monitored InTrade, BetFair and NewsFutures on election day. Data are on my webpage. Watch the intraday chart and also read the addendum. InTrade and BetFair were all for Bush, until Jack Shafer et al leaked the early exit polls. But the seven-hour Kerry presidency is another story.
Wish you a good week. It’s snowing here in southeastern France. I correlate that with the fact that I’m taking the defense of a neocon. I blame you for my cold feet.
BTW, Luskin was not tossed from real money — he quit.
He had gotten into a bit of a pissing match with Doug Kass, Jim Cramer, and a few others, and left in a huff.
No, not the most classy exit — but he certainly did not get thrown off the site . . .