Tuesday, June 15, 2010

More on Intrade and the skewed Climate Bet

(Original post here.  Summary:  people trying to criticize Al Gore set up a skewed bet against him on Intrade, which they are in the process of losing anyway.)

As current global temperatures continue being awful, the Intrade bet between exaggerated warming trends for a ridiculously short 3-year period and no warming clearly supports the high end warming at a 3:1 market ratio right now.  A while after my first post on this subject, I contacted Andreas Grafe, one of the people who set up the bet and who works with climate denialist Scott Armstrong.

To Grafe's credit, he did respond to my first email.  He says he never had an opinion on the climate issue and just wanted to set up a prediction market as part of his academic work on those markets.  He also points out that Armstrong would only expect a slightly greater than 50% chance of winning based on a short time frame, and mentions a longer ten-year time frame on an imaginary-money market (Hubdub) that has now shut down.

However.  No response to my pointing out that the IPCC didn't predict a short term rise of .03C/year in 1990, or the differences with modern IPCC predictions.  He did say that they wanted but couldn't get a ten year period from Intrade, but I think and said that a three year period is so short to be virtually useless.  Never heard back from my second email.

I'd hope that after the Climatebet crowing over "winning" the first 20 months of their bet, that Grafe would distance himself from their nonsense.  Maybe he did a little bit, but if he wants to help with useful prediction markets, he needs something better than this.


  1. Anonymous3:29 PM

    So how many $10 no coupons do you hold ?


  2. Don't quite understand the comment - I've never actually used Intrade, is that what the coupons mean?

  3. Anonymous3:58 AM

    >"never actually used Intrade" well that answers the question even if I think you are wrong about this. You have used intrade prices to make points you wanted to make on this blog. Presumably all your talk and betting is an indication that you want there to be betting markets.

    So my comment was to indicate that if you are willing to bet, want markets to be set up and/or run with a bit more liquidity, and for the market to produce prices with which you can make points on your blog then perhaps you ought to join in. Wanting the prices to be available but not joining in might undermine your position. There may of course be reasonable excuse like it is illegal for you to do so.


  4. I just want a good betting market, and this skewed bet isn't a good one. Especially at the current price.

    I've thought about writing Intrade to encourage them to set up a similar market for a ten year bet, skeptics v. the IPCC, middle point between the skeptics expectation of no increase and the IPCC average expectation of .2C/decade. If that were trading at 50, I'd definitely buy in.

  5. Anonymous5:46 AM

    >"Especially at the current price."

    What does that mean? If it was close to the price you thought appropriate that would presumably mean it was a good market so the implication is that you think it is far from what you think is the appropriate price. If so, shouldn't you be keen to join?

    I would definitely agree that the bet is skewed in that it doesn't answer the purpose for which it was supposedly set up per the climate bet website. I would suggest that just because the purpose is skewed doesn't make it a bad market. However, I don't know what you mean by "a good betting market". Is it price close to where it should be? High liquidity? Low buy sell range? More importantly why isn't it a good market?

    What is wrong with the GLOBAL.TEMP.10-14>05-09 contract? Why would 10 years be better than 5? It seems to me like 5 is too long for adequate liquidity.

    If liquidity is the problem then people commenting that they want markets to see the price but won't join in themselves get what they deserve. If they are not prepared to take part then they shouldn't complain at lack of action on the contracts because they are at least as much to blame as anyone.


  6. It's skewed from being a test of "climate mainstream v. skeptic" position to something else, while pretending to be a bet testing Gore and Armstrong positions against each other.

    So it's not a bad market per se (actually, it has problems in that there's little trading going on, but that's a different issue), it's a bad test of mainstream science.

    The market you've suggested is new to me. It's a test of the mainstream position only, which is okay to do. The current price range 45-65 should be somewhat attractive to skeptics but is just what a mainstream believer like myself would predict, and therefore doesn't make me want to trade. The problem with the five year period though is that's such a short period that random noise is likely to drown out the signal of climate change. A longer period would be much better. I'd consider it a significant improvement over Gore v Armstrong in terms of being a prediction market testing the mainstream scientific prediction, but still fall short of lasting an adequate time period. Maybe worth its own blog post.

    Not sure what you mean by lacking liquidity - people can buy and sell any time they want. Can you explain?

  7. Reading again, maybe you mean lacking liquidity that people aren't trading. For this market you've mentioned at this price, the skeptics are to blame - they're the ones who should be attracted by the price. Except even they could say something like, "during a five year period I've got a greater chance of winning than losing, but it's only a slightly greater chance because of all the random noise, so I'm not sure I want to get into that market."

  8. Anonymous9:15 AM

    >"Not sure what you mean by lacking liquidity - people can buy and sell any time they want. Can you explain?"

    If I wanted to buy 500 $10 no coupons at the current best book order buying price of 20 then yes I can buy some at that price but in fact there are only 4 on offer at that price and the next best book order price is 12. So if I want more than 4 I need to move the market price a long way.

    In other words "In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value." copied from wikipedia article 'Market Liquidity'.

    Generally a highly liquid market would have a lot of trades but if the participants generally agree about the appropriate price and place lots of book orders then you could have a highly liquid market with few trades.

    If the skeptics were right to be skeptical, you would expect lots of disagreement over the appropriate price and therefore lots of trades if the market had sufficient liquidity. If the market does not have much liquidity, then it is much harder to say "see the septics don't believe what they say".


  9. Anonymous3:48 AM

    >"the skeptics are to blame - they're the ones who should be attracted by the price"
    >"it's only a slightly greater chance because of all the random noise, so I'm not sure I want to get into that market"

    Why wouldn't they want to get into the market? Well it is a bad idea to hold illiquid assets if you might want to sell the asset as you may have to accept a price significantly less than fair value. (Another issue is risk aversity for which the longer contracts may be the best solution.)

    The longer the period, the more serious this problem is and the less likely the market is to have sufficient liquidity.

    I therefore suggest that 5 years is an appropriate compromise between a long period (like 10 years) where low liquidity is likely to be a major problem and a short term (1 or 2 years) where the contract become about ENSO predictability rather than what happens to global temperatures or a test of mainstream science.

    If there was sufficient liquidity for the 5 year contract then it might be worth pushing for a 10 year contract. While there isn't sufficient liquidity then it seems to me that there is more point in trying to work on increasing the liquidity than on getting longer contracts. i.e. get the contracts known about in septic circles and if they get involved that will also attract the mainstream believers.


  10. I don't know crandles - a ten year bet theoretically could be just as liquid or more liquid than a five year bet, because the signal v. noise ratio expectation for both mainsteam people and skeptics should be stronger and more differentiated from each other, so both should be willing to bet. At the price of $40 for temps going up .1C/decade, I'd be tempted to buy if it was a 10 year bet but much less so at five years. I think risk aversion supports longer bets where signal overcomes noise, rather than short ones.

    My prediction, which seems to be borne out by the two existing markets, is that the price would stay very near to mainstream expectations. Skeptics will be betting against the market and will have no trouble finding trades that they'd consider advantageous.

    OTOH, you're the one with actual experience in these markets.

  11. Brian: the problem with long-term markets is that either you've buying in the expectation of the market price shifting soon so you can cash out or you plan to hold to completion.

    Weather is a bad match for the former kind of trader, for obvious reasons (any changes happens slowly, while with a presidential election market, say, one state primary loss or victory will change the market price/probability a lot, enough to cash out on.)

    With the latter, the problem is that over 10 years, you have serious opportunity cost - you could have invested in Treasuries, say, and compounding your interest. 0% risk, and ~%20 return (at 2% a year). The risk even for an optimistic mainstreamer is described here as being easily 30%, and the return is ~40%? A quick expected value calculation: 1 * 1.2 < 0.7*1.4 == False.

    So either way, it's a bad use of your money. Liquidity issues just exacerbate the problem.

  12. Gwern: reasonable point about the long-term hold issue. I've only been operating under typical bets where each bettor holds his own money and could invest it in say, Treasuries. It's the basic reason why I don't see an advantage in the current markets for placing a bet if you hold the mainstream position.

    It all depends on the odds you calculate though. The risk of the mainstream position losing is far less than 30% IMHO if the bet is five year average temps, ten years apart. And the skeptic right now gets a far higher return than I do, so the skeptic's reason for putting money behind their predictions should be very strong.

  13. Anonymous4:08 PM

    FWIW there is now a offer to buy 500 coupons at 3. All the rest of the buy orders are my own to cash in profit rather than having to wait until after the end of the year. Maybe this is just someone else like me trying to cash in their profit.

    If it isn't they have had to transfer 500 * $10 * 3% = US $150 to make that buy order offer. To take it up you have to have $4850 plus $15 for fees. If won you get 500*$9.90 = $4950

    A return of $85 on $4865 or 1.747% in just over 4 months. This is about 5%apr. Hardly a huge return for the risk so the risk must be negligable, right ;o) (yes I am joking about that, the market does prove that because the lowest sell book order offer is at 9.9 not 3.)


  14. Anonymous5:36 PM

    "It all depends on the odds you calculate though. The risk of the mainstream position losing is far less than 30% IMHO if the bet is five year average temps, ten years apart. And the skeptic right now gets a far higher return than I do, so the skeptic's reason for putting money behind their predictions should be very strong."

    Maybe if the skeptic truely believes the position is a very long way from the mainstream position. For a skeptic who has a position that is a small difference to the mainstream position then the opportunity cost and fees become overwhelming.

    grern wrote:
    "and the return is ~40%?"
    Lets try to stick to a real example: the highest buy price of intrade's GLOBAL.TEMP.10-14>05-09 is at the time of writing 40. It costs US $6.05 to accept that book order offer and if won you get $9.90 so the total return is 63.63%.

    63.63% over 4.35 years is a rate of return of 12% which is significantly more than the suggested 2% risk free rate. However this does not take account of the risk involved. If you believe there is a 35% risk then the $9.90 potential stake plus reward is only worth an expected 9.90 * 65% = $6.435 in 2015 and the rate of return is reduced to 1.4%pa. Clearly less than the 2% risk free rate.

    That contract require a 0.1C increase over the period to pay out and that is faster than the current rate and the IPCC projection so an IPCC mainstreamist might believe the risk is greater than 50%.

    It can therefore be concluded that the person above think there is only a 35% risk is significantly on the alarmist side of the IPCC mainstream. A mainstreamist (~40%? chance of contract being true) has little incentive to place a buy order at much over 30 offering expected return of only 6.6%pa and it would take someone seriously on the alarmist side to do so.

    A skeptic should think that there is less than that ~40% chance of contract being judged true. Lets try a belief of 30% chance of contract being true:

    If book order to sell is placed at 60 which is then accepted, I calculate a 13.5%pa expected return. This is a decent return and skeptics who truely believe what they say should be willing to place such orders provided there is some chance of them being accepted. As we have seen, there really isn't any serious chance of that happening for large amounts of money as it would take seriously alarmist views to make it worth accepting.

    Skeptic would have to be almost completely sure the contract will be false in order to place an order to sell at 45 or lower. Max expected return 14.5%pa and even at that price the expectation should probably be that the order wouldn't be filled.

    As we have seen, such an order doesn't get accepted by mildly alarmist people.

    Is there much to say that skeptic have hugely different positions to the mainstream IPCC view as opposed to them have views that are just mildly on the skeptic side of IPCC view? I have seen lots of nonsense written on the net but maybe such people are politically motivated and would think more carefully before actually betting in accordance with what they say.

    Someone might think they are a skeptic but actually think there is as much as 35% chance of this contract being true. In which case they are unlikely to place a book order to sell at less than 50. (Consider risk of tieing up money and no one accepting so expected return is 0 rather than 2%.)

    Hope that makes sense and I haven't messed up the calculations.

    So I am far from convinced of your "the skeptic right now gets a far higher return than I do". It looks to me that your basic reason for not investing is similarly overwhelming for the skeptics unless they have hugely different views to the mainstream and even then it is a serious issue for them.



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