And as they round the first turn, it is Bernanke out front, with Feldstein and Hubbard trailing by two lengths

All economists love markets. Most economists hate gambling. So I don’t know whether or not to be surprised by the fact that my friends at tradesports are offering a line on which economist will be the next Chairman of the Federal Reserve. (At Tradesports, go to the trading screen and search under “Current Events – Federal Reserve.”

Consistent with the idea that economists hate gambling, the total value of all contracts traded so far by all market participants is less than I bet on a typical football game.

If you want to call this a market given how little trading there is, what does the market think? Ben Bernanke is the odds-on favorite with his chances placed between 55 and 60 percent. Glenn Hubbard is #2 at about 25% and Martin Feldstein at about 18%.

The market maker in this market must be an economist. At the current “ask” price, he or she is willing to take up to a $3 bet (wow, now that is taking some risk) that any of the contenders will lose if you are willing to pay the price. And at the current ask price, the cumulative odds of the various contenders winning sums to more than 200%. You can get better odds playing the lottery than betting across the board on the various contenders to win.

Do you remember when Poindexter wanted to create markets in things like whether the Israeli prime minister would be assassinated? Markets like the Federal Reserve Chairman and assassinations are rife with private information. It is hard to believe that they could ever work very well, or attract sufficient trading volume to make them a useful information aggregator.

But at least they give economists something to blog about.

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  1. Crazy says:

    Bookmakers in London suspended betting on which Harry Potter character would be killed in the new book when an unusual number of bets on the same character came from the town where the book was being printed. The maximum bet was 50 pounds per account and the bookmakers noticed a bunch of people making new accounts and betting the maximum. I think this sort of thing happened with betting on the Apprentice show as well.

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  2. David Diano says:

    For shows like Apprentice or Survivor, it is completely idiotic for bookmakers to take action on these, since the outcomes are already know in advance by some human being.

    Wagering, ideally, should be on events that haven’t transpired yet.

    In the case of these “reality” shows, the participants know who the last two are before the first show even airs. So, anyone with knowledge of the final two has an advantage over a bookmaker who gives all players equal chance of winning.

    In wagering on Football or other sports, the outcome is not predetermined unless there is deliberate cheating. Inside information is usually restricted to unpublicized injuries or a coach’s strategy.

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  3. Anonymous says:

    Comments on Tradesports from an Active Trader:

    1) Tradesports is a great market for those who can figure out the liquidity issues. Many of these “select one of the following” bets have the ability to be traded as a basket and continually make money. Often, I have found that every so often you can short every single contract in Federal Reserve Chairman market. Well, if you can sell 200 worth of contracts but only have to pay 100 for one of the contracts expiring…. Turns out this is a pretty common occurrence on Tradesports! (Especially in the more illiquid contracts)

    A great example of this occurs during the Oscars betting. This year, you could buy the complete basket on the best actor and best film for less than 100. The surprising thing was there was significant liquidity so you could do it in volume!

    2) Tradesports needs to provide historical data. It is a shame that they don’t provide trade data in a downloadable format. This would help to drive out market inefficiencies.

    3) Tradesports needs to disclose (in greater detail) the presence of market makers and other mechanisms used to drive trading. Everyone I talk to about Tradesports likes the concept but thinks it is rigged. Why not drive to the best possible transparency? (Does everyone use the same interfaces or have the same access?)

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  4. Robin Hanson says:

    You don’t think TradeSports works well to forecast the next Chairman? If so, put up or shut up; tell us your better estimate than Bernanke at 55-60%. (And tell us why you don’t make some money betting on your better estimate.) And since you aren’t available 24/7 to offer such estimates, why don’t you tell us a better source to go to for estimates on such topics.

    You don’t know of anything better? Well then Tradesports works just great by the relevant economic standard – it works better than anything else we have.

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  5. Anonymous says:

    A bit off-topic, but I heard once an economist talk about gambling. He (I think) said that it makes no sense whatsoever to buy scratch-off cards, because the best-case scenario (winning $500) won’t change your standard of living appreciably. In contrast, investing, say, $50/year on megabucks lotto tickets may well be worth the trouble, since the expected/worst case return, -$50, won’t appreciably change your standard of living, while the best case return, $100,000,000, would of course be huge! Every once in a while I’ll buy a $1 ticket and think about this… -Harlan

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  6. Anonymous says:

    More off topic . . .
    I recently read in the Economist that eBay has $40 billion worth of transactions a year–would eBay ever let economists see some of that information?

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  7. Scott says:

    I must agree with Hansen. I think Tradesports or any other market that draws from a variety of people does a better job predicting then an individual can. At least in the long run.

    And I must say I am surprised you poo-poo futures markets abilities to predict the future. You certainly raise a strong point about liquidity and the number of actors but your dismissal of futures markets all together seems out of character. Given your faith in data I would think comparing Tradesports predictions with the actual results would have made you a believer.

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  8. Anonymous says:

    The futures market for a Fed Chairman, unlike say the futures market for a Fed rate-change, is far less valuable to the whole market. That is, the information is not very valuable information to anyone. It does not serve as a hedge against any particular strategy.

    The only person who should make a bet in this market is someone with a direct risk/reward consequence to the decision. Perhaps someone like. . .Ben Bernanke?

    If I were Feldstein, I would buy some Bernankes.

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