Felix Salmon at Portfolio.com chided The Wall Street Journal's Mark Gongloff who wrote a piece Tuesday expressing skepticism at so-called "prediction markets," like the Iowa Electronic Market. Salmon is right that Gongloff did not make it clear that these markets have to be read probabalistically, that is, less like a crystal-ball forecaster and more like race track odds. And he's also right that pundits often confuse what those markets -- and by extension, markets generally -- are doing.
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But there is a larger point to be made here about the promiscuous distortion of market dynamics in the media -- the tendency to overstate both their "accuracy" and, generally, the wisdom of markets as predictors. (Some of this extends deeply into the academic debate over efficient markets, much of which turns on very precise -- if not always intuitive -- definitions.) Indeed, the very use of the term "prediction" market tends to lead folks astray from the notion that markets always offer a relative or probabalistic picture of a future that -- and this is important -- changes over time. How many stories, for instance, decry that a market or a stock has fallen as if that's the final and absolute judgment on a given situation? How many stories are written that six months before an election a given candidate has better odds on Intrade of winning -- stories that are nearly always concluded with sermonettes about how accurate Intrade has been in the past. The fact is, in the real world, where some folks know stats and some folks know nothing, the play of daily prices or daily odds assumes a predictive quality, today's absolute truth. Tomorrow will feature a new version.
This is a comment without a prescription. It's the way things are. The fact is, both the lay public and the smart money, deep in their economic souls, may know about uncertainty and duration and probability, but they really crave predictability. And in our age, the crowd (which includes politicians) is perfectly willing to confuse a "probability market" with a "prediction market" and a complex, contingent, profoundly relative market "wisdom" for a daily dose of all-purpose, kick-the-boulder certainty. Today's certainty is all that matters. - Robert Teitelman
