On Bookies And Economic Gurus
May 13th, 2008 | By Gary North | Category: Politics & EconomicsI monitor a chart on a website that almost no economic forecaster pays any attention to. The chart has indicated a remarkable shift toward economic optimism. It has indicated that the American economy will not fall into recession this year. This shift has taken place in the last three weeks.
The problem with the chart and the site is that, by design, no explanations are ever offered. There is no theory of why the economy will or will not fall into recession. That is because the site is a gambling site. You pays your money and you take your chances.
The site is Intrade. It is a web-based site. It is run from Dublin. If the owner ever sets foot on U.S. soil, he will be arrested, tried, convicted, and sent to jail. But he can afford to stay out of the United States. He is a very rich bookie.
The site allows gamblers to make bets on future events to take place or not take place during a defined time frame. One of these listed events is recession in the U.S. in 2008. As recently as mid-April, betting was over 70% that there will be a recession this year. Then, without warning, the odds turned the other way. Today, the odds are 27%.
This is a major shift of opinion. In the sports world, it would be as if Michael Jordan had been seriously injured mid-season when he played for the Bulls. You can see the chart here:
http://www.garynorth.com
A law passed in 2006 that prohibits U.S.-based banks from making credit card payments to off-shore gambling sites: The Internet Gambling Enforcement Act of 2006. So, the betters on Intrade are not Americans, other than Americans who have opened off-shore bank accounts and who use foreign post office boxes as their addresses. This is not many Americans. The site is limited to those few Americans who value their privacy and who want a way to make payments even if the government closes certain doors, either on all Americans or on them personally.
So, the chart reflects foreigners’ assessments of U.S. economic prospects in 2008. They were very pessimistic in mid-April. They are no longer pessimistic today.
The magnitude of the shift and the speed of the shift are what caught my attention. These are not marginal moves.
How do the gamblers define “recession”? As the National Bureau of Economic Research is widely believed to define it, but in fact doesn’t.
For expiry purposes, a recession is defined as two successive quarters of negative real GDP growth.
Expiry will be based soley on the data reported by the U.S. Department of Commerce (Bureau of Economic Analysis, Table 1.1.1, “Percent Change From Preceding Period in Real Gross Domestic Product”) as reported by the BEA.
This is how most informed American investors define a recession.
WHY TAKE THIS SERIOUSLY?
For well over a century, statisticians have known that predictions made by large numbers of people — over a thousand — are more accurate than predictions made by experts. This phenomenon was discovered by Charles Darwin’s cousin, Francis Galton, who was a statistician. He did an experiment at a county fair. He asked a large number of attendees to estimate the butchered weight of an ox. There was a contest to see who could estimate it most accurately. He found that the average of the estimate was more accurate than the guesses made by livestock experts.
This phenomenon has been repeated for over a century. Again and again, the results are the same. An average of the guesses turns out to be very accurate. This fact and some of its implications were summarized in a best-selling book in 2004, “The Wisdom of Crowds,” by James Surowiecki.
Over the last few years, there have been several websites set up that allow people to guess about future events. Some of them use play money to stay out of the government’s clutches. One is set up as a commodity futures exchange, which is legal for bets (investments) under $500. Then there are the foreign gambling sites.
These sites post the results of the bets. They publish charts. I monitor some of these charts, just to see what’s happening in the world of non-sports betting. I especially pay attention to sites where gambling is for real money. Intrade is one of the largest. It merged with TradeSports several years ago.
Galton’s discovery confirms an important insight of free market economists, most notably F. A. Hayek. In his most important article, “The Use of Knowledge in Society” (1945), Hayek argued that central economic planning cannot be as efficient as free market economic planning because central panning boards cannot accumulate or accurately assess the information possessed by the investing public. Knowledge is decentralized. No man knows more than a sliver of this knowledge.
The supreme task of society, Hayek argued, is to gain access to the best knowledge available. This can be done only through private ownership, the legal right to exchange, and the profit-and-loss system. Central planning interferes with all three.
Galton’s discovery is a specific application of Hayek’s general theory regarding decentralized knowledge. It seems that the highly specific knowledge possessed by large numbers of people is superior to expert knowledge possessed by a handful of individuals.
This is bad news for investment advisors as well as central planners. I think this is why we see so few references to these new prediction market sites. Investment advisors do not want to think a bookie has access to more accurate knowledge than they do.
The thought that the bookie then posts a chart in the free section of his website . . . well, it’s clearly un-American. I know this must be true, because when a free market economist, Robin Hanson, recommended the creation of a betting site for future terrorist acts, in order to better assess their likelihood, there was such a firestorm of criticism from Congress that the Defense Department dropped the idea the day after news of the suggestion hit the media. When a free market solution for a better system than the colored terrorism alert system used by the government, Congress saw red. That was in 2003. It seems even more un-American today.
Yet few Americans know that this same technique was used in 1968 to locate the sunk American submarine, The Scorpion. I first read about this years ago in the book, “Blind Man’s Bluff.” It had been recommended to me by a retired captain of a submarine. This story is summarized by Prof. Arthur Rubenstein.
The Navy had all but given up hope of finding the submarine when John Craven, who was their top deep-water scientist, came up with a plan which pre-dated the explosion of interest in prediction markets by decades. He simply turned to a group of submarine and salvage experts and asked them to bet on the probabilities of what could have happened. Taking an average of their responses, he was able to identify the location of the missing vessel to within a furlong (220 yards) of its actual location. The sub was found.
http://www.garynorth.com/snip
Stocks have been hammered for the past 5 years – down 10% according to the S&P 500 index. Gold, meanwhile, is up about 100% during that time. What few Americans realize, however, is that there's a unique gold investment, created and issued by the U.S. Treasury Dept., which skyrockets AFTER gold prices soar. Last time conditions were this good, it went up 665%... and it's beginning to soar again right now.
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Gary North, at the age of 25, was the youngest elected member of the Economists' National Committee on Monetary Policy. He has served as a senior staff member of the Foundation for Economic Education and as a research assistant to U.S. Congressman Ron Paul.
