« Mapping Strategy | Main | TradeSports looking for CFTC regulation »

May 04, 2005

Observed bias in FX markets

James Annan, a climate scientist working with a Japanese climate research center, recently posted an interesting analysis to the discussion list for the Foresight Exchange. (FX)
There has been an ongoing discussion on the FX lists about observed biases in those (play money) markets. Some people believe that there's a bias toward the midpoint in all prices, so that few claims actually carry prices that are near the extremes, even though there are many claims that are believed to be nearly certain or nearly impossible (AKA, "crackpot claims"). This is justified because play money allows (perhaps even encourages) participants to bet on long shots. In addition, betting for the long shot is cheap and would have a large payback if it ever came in.

Others think they see a bias toward the negative--more claims trade significantly lower than even odds than trade significantly higher than even. The usual justification for this bias is that FX prefers claims that are phrased as positives (even X will happen) so people don't have to reason about double negatives in order to undestand the claim. The most interesting claims are those that will be expected to be controversial, so it's easy to get approval for claims on unlikely occurrences. The result is a preponderance of crackpot claims, so low prices shouldn't have been unexpected.

Given that context, James did an analysis of all claims that closed before the year 2000, sorting them according to their prices as of a year before their due dates. He then divided them into 4 groups based on price, and graphed the result.

Two quotes to notice from James' email messages:

"It looks like the market has some credibility, but a substantial bias in favour of lower-priced claims which are clearly over-priced. Nothing with a price of 0.36 or lower with one year to go actually came true!"

"Note that 75% of all these claims eventually paid $0, and almost half of them were in my bottom bin."

This looks to me like further fodder for the discussion about the effects of real money on prediction markets. I don't think anyone has found a similar bias in any real-money market.

Posted by chris at May 4, 2005 01:51 PM

Trackback Pings

TrackBack URL for this entry:
http://blog.commerce.net/mt-tb.cgi/125

Listed below are links to weblogs that reference Observed bias in FX markets:

» online casino from online casino
You are invited to check the sites in the field of online casino online casinos [Read More]

Tracked on June 6, 2005 09:12 AM

» mobic from mobic
In your free time, check some information in the field of weight loss drugs diet [Read More]

Tracked on June 10, 2005 06:47 PM

» viagra online from viagra online
Please check some information about pharmacy [Read More]

Tracked on June 11, 2005 03:26 AM

» online poker from online poker
In your free time, visit the sites dedicated to online poker [Read More]

Tracked on June 11, 2005 01:54 PM

» blackjack from blackjack
Please visit some information about blackjack [Read More]

Tracked on June 11, 2005 09:59 PM

» blackjack from blackjack
Please visit some information about blackjack [Read More]

Tracked on June 11, 2005 09:59 PM

» party poker from party poker
You are invited to visit the pages about party poker [Read More]

Tracked on June 12, 2005 07:55 AM

» internet casino from internet casino
You may find it interesting to visit some helpful info about online casino online casinos [Read More]

Tracked on June 13, 2005 03:55 AM

» party poker from party poker
You may find it interesting to check out the pages in the field of party poker [Read More]

Tracked on June 13, 2005 10:02 PM

» casino games from casino games
In your free time, take a look at the sites about online casino online casinos [Read More]

Tracked on June 17, 2005 07:01 AM

» online casino gambling from online casino gambling
You are invited to check out some relevant information about online casinos slot machines [Read More]

Tracked on June 17, 2005 05:36 PM

» betting line from betting line
You can also check out some relevant pages about roulette jack black [Read More]

Tracked on June 19, 2005 12:56 AM

» online casino gambling from online casino gambling
You are invited to check some information in the field of online casino online casinos [Read More]

Tracked on June 19, 2005 11:02 AM

» poker rules from poker rules
Please visit the pages on poker rules [Read More]

Tracked on June 20, 2005 01:17 PM

» online casino gambling from online casino gambling
Please visit the pages dedicated to online casino gambling [Read More]

Tracked on June 21, 2005 04:26 PM

» history of texas hold em from history of texas hold em
In your free time, check the pages on play free poker poker chip stickers [Read More]

Tracked on June 23, 2005 10:43 AM

» slot machine from slot machine
In your free time, check out the pages in the field of jack black craps las vegas casinos [Read More]

Tracked on June 24, 2005 07:41 PM

» middle english literature from philippine literature
literature guides literature genres marvin redpost kidnapped at birth literature discussion erotic literature on line high and low literature literature fulfillment themes in world literature literature units thailand literature modernism in literature... [Read More]

Tracked on September 23, 2005 02:24 PM

Comments