Tuesday, April 29

A Second Look (Math and econ edition)

This is the first post in what will become a regular feature on this blog: A look back at previous posts that are related to newly-discovered content.

Further support for prediction markets.

Trading on the Wisdom of Crowds (Wall Street Journal)
How accurate are prediction markets in U.S. elections? (Yahoo! Answers)

Earlier: How to predict the future


What are your odds of dying from a given injury?

Odds of Dying (National Safety Council)

Earlier: Suicide hotlines


Economists, on the question of organ markets as a solution to the organ donor shortage.

Human Organs for Sale, Legally, in ... Which Country? (Freakonomics Blog)
Financial Compensation for Organ Donors is Working (Marginal Revolution)

Earlier: Kidneys for sale?

Sunday, April 27

Frequent flying

We Love to Fly and It Shows: Inside the World of Mileage Running (Wired)

A fun look inside the strange practice of "mileage running," in which the goal is to accumulate a large amount of frequent flyer miles at the lowest cost per mile. Practitioners actually try to add as many connections as possible into their flights (as long as it doesn't increase the cost), solely for the purpose of racking up additional miles. The most dedicated mileage runners travel to faraway places purely to earn miles, and don't actually spend any time at their destinations!

So why take up such a hobby? It sounds like the main motivation is receiving the perks associated with being a frequent flyer, as well as the joy of solving a complex problem and feeling like you are "beating the system."

Strange, but true.

Wednesday, April 23

The more things change...

All change? (Economist)

Without question, liberals in the U.S. have (for years) been desperate for the departure of George W. Bush from the presidency, confident that a change in leadership will turn the country around. This Economist article warns that at least in the area of foreign policy, the likelihood is that the next President (regardless of who it is) will not make drastic policy changes, nor should they.

A highly opinionated, thought-provoking piece.

Monday, April 21

Facebook: destined for obscurity?

Everywhere and nowhere (Economist)

Although I love Facebook, and have always felt that they offer the premier online social networking tool, my gut tells me that as a company they may very well fail. Part of the reason is that they are a one-trick pony: They do one thing, and they do it really well. But what's the likelihood that in ten years (or five even), they will still be the dominant player in the social networking arena? Contrast that with Google, who is still king of online searching, but at the same time seems to be releasing a new product every other week in an attempt to diversify their offerings.

This very smart Economist article adds some meat to my argument. It asserts that closed social networking tools (like Facebook), which force you to visit their website and use their specific tools to communicate with your friends, are "a drag" and will ultimately lose out to "open social networks." These open networks would be integrated into your core Internet tools (such as e-mail), would infer your "social graph" from the actions you already take (who you e-mail the most, or how you tag people in your address book), and would be transparent and work almost automatically. In short, they would remove the annoying and needless complexity of managing your online social life (your profile, photos, groups, friend lists, etc.) through mulitple websites.

There are already existing tools (such as FriendFeed) which can aggregate your online life into one space, but these tools do nothing to break down the barriers between the various closed social networks. Something more revolutionary is needed, and I have no doubt that it is technologically feasible.

The only question is: Who will be the one to innovate, and who will fold as a result?

Saturday, April 12

How to predict the future

Betting to Improve the Odds (New York Times)

In my opinion, one of the greatest developments to come out of the Internet is the ability to effectively harness the knowledge of a wide variety of people (also known as "wisdom of the crowds") for projects such as Wikipedia. With Wikipedia, the goal is to organize and share information, but the wisdom of the crowds can be used for many other purposes.

This New York Times article discusses "prediction markets," in which individuals can essentially place bets on the outcome of a particular event (such as "Will Hillary Clinton be the Democratic nominee for President?"). Placing bets ("trades") in a prediction market is kind of like stock trading, except that the "share price" stays between 0 and 100 and reflects the current probability (in the minds of the traders) that the event will occur. In the Hillary Clinton example, her market at Intrade is currently trading at 15.4, meaning that traders believe her current probability of clinching the nomination to be 15.4%. If a trader thinks the likelihood is greater than 15.4%, they can buy shares (hoping the market will go up), and if it does they will make money. Eventually, all markets resolve at 100 (if the event happens) or 0 (if it does not happen), but in the meantime the share price is determined purely by trading activity.

I'm a big fan of prediction markets because the traders have an incentive (i.e. making money) to research the most likely outcome of events, and thus as long as the markets are being actively traded, the markets should demonstrate the probability of an outcome occurring much more accurately than polling, individual research studies, or any other predictive tool. Furthermore, those individuals with insider information and/or expert knowledge about these events have the greatest incentive to participate in prediction markets, which should further increase the accuracy of the markets.

The Times article describes how prediction markets are now being used internally by corporations as a way to improve their forecasting, such as predicting whether a new product will launch on time. As long as there are incentives (such as money or prizes) for predicting outcomes correctly, the "wisdom of the crowds" should indeed shine through in the market activity.

Legitimate concerns do exist about prediction markets, such as the possibility that someone could profit from participating in a market in which they can determine the outcome, or other types of market manipulation. As well, there are markets that could be considered tasteless, such as the Pentagon's failed Policy Analysis Market (in which bets could be placed on the likelihood of terrorist attacks) or the Celebrity Dead Pool (in which bets are placed on who will die this year).

Regardless, I have no doubt that prediction markets are here to stay, and will increasingly be used to tap our collective wisdom. And as long as participation increases, incentives remain, and systems are put in place to prevent fraud, prediction markets should only become more and more accurate.

Thursday, April 3

A uniquely American business

Illegal Globally, Bail for Profit Remains in U.S. (New York Times)

A fascinating article about the uniquely American business of bail bonds, in which private businesses post bail for criminal defendants in return for a fee. Though the system lends itself to corrupt practices and leaves a great deal of decision-making power in the hands of private citizens (who are free to set their own fees and accept or reject clients at will), the article suggests that it is actually remarkably effective at ensuring that defendants appear in court or are captured if they do flee -- all at no cost to the taxpayer. (Score one for American private enterprise!)

This follow-up post on the Freakonomics blog by economist Ian Ayres also argues in favor of the bail bond system: His research shows that the market competition inherent in the system serves to reduce (not increase) judicial discrimination against minority defendants, and may also serve to protect poor defendants.