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- Re: Information, networks, and markets
By: David Allen
Date: Jan 21, 2008 1:21 PM
Notification
« Social Network Feedback in Real Time | Main | Sunbelt 2008: Day 1 »
19 January 2008
Information, networks, and markets
It is notable, if not surprising, that the best place, in all of the Internet, to go for a sense of the direction that an election is going is intrade.com. Intrade is a futures market, where you can buy and sell contracts that pay off depending on the outcome of some event in the future. So, what has happened in the primaries is that that the futures market shows substantial shifts through the day of the event. Today is typical, where hours before poll closings, the market for the Republican race South Carolina swung hard toward McCain (who apparently is going to win).
What is interesting is that, as far as I can see, these markets swing before any other information is available on the Internet. That is, the market is being driven by those who presumably have a close connection to inside information—i.e. exit polls. This is not to say that employees of CNN are taking time off during the day to put money into intrade contracts, but that there is an informal leakage of information from those in the know, where that leakage then drives the market. That information can be misleading, of course (cf. Kerry, 2004); but the market allows for that possibility (e.g., even now Huckabee is trading at 2%).
This is an interesting natural experiment of sorts, because there those exit polls are likely by far the most reliable sources of information available regarding election outcomes (especially for primaries) before actual results come in. There are other bits of information that may be independently valuable, like any data on differential turnout across regions, etc, but generally the exit poll data are going to dominate everything else. It would therefore be interesting to calibrate the actual data that exit poll entities have gathered at what points in time (minute by minute) to see how quickly intrade responds. This should provide some sense of the speed of informational leakage from the exit polls. (And if you know of anyone has already done this, please post a comment.)
Btw, this graph shows the shift in the value of the McCain winning SC contract:
Note that the time marked is GMT, so the major shift occurred at around 6pm EST (exit polls were not released publicly until after 8pm).
Posted by David Lazer at January 19, 2008 9:12 PM
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Comments
Most intriguing.
As those who follow know, there has been a pretty fierce debate.
On one side, the argument is that ‘markets are better than polls’ at parsing information (and better than pundits, even serious intellectual research, and – particularly – better than deliberation). So the proposition goes, when money is at stake, the investor will get it right. On the other side, there is dismay at one more instance of holding up money as the way to settle social questions. This view would go something like, we need to get methods of deliberation right, rather than compare markets to broken deliberative rituals.
Cass Sunstein has published on the question, largely coming down for markets. Hal Varian has been associated with the position. You can likely add others. When Sunstein presented at a Kennedy School seminar around the time of his book, there was lively debate.
As you describe it David, this instance – the McCain upswing in price – is an intriguing window into the question. Rather than poll versus market, this is the poll driving the market – the poll is prior to the market, and it is the determining force.
Do we want our collective wisdom to derive from votes cast individually by buyers/sellers? Most especially, do we want it via insider trading – votes cast by a few with privileged access to unpublished data? That is the very antithesis of shared access and deliberative processing, for the key issues before a community.
Do we want the incentives to point to such individualistic mechanisms, with control of information skewed to some insider? Or, can we repair deliberative mechanisms gone awry, by inculcating a very different culture of incentives? Societies without a tradition of sophisticated deliberation may not so easily imagine the benefits, if they would consider a new, more nuanced day.
The McCain intraday data can be checked against the Clinton win in New Hampshire. There, of course, polls from the few preceding days rather dramatically mislead as to the final result. Does a thoughtful inspection of intraday data for New Hampshire also reveal privileged access to exit polling through the day?
Posted by: David Allen at January 21, 2008 1:21 PM