Scottish Referendum: Prediction Markets Versus Economists

16 09 2014

Predictions markets allow individual to bet real money on a wide range of events that extend from droughts in the US corn belt to elections. They have a fairly good track record in predicting the future because they aggregate the wisdom of large numbers of participants and they punish wishful thinking and reward unemotional realism. Prediction markets strongly encourage those making predictions to put their own normative views aside. They are, in the words of blogger Bryan Caplan, the ultimate tax on bullshit. Anyone can a make a prediction, but unless they have bet money on it, they are unlikely to the punished in the prediction is wrong: as Dan Gardner showed in FutureBabble, very few people who make false predictions are punished when their predictions are falsified. That’s why it was terribly unfair when Nate Silver, the pollster who correctly called the 2012 presidential election, was criticized by his bosses at the New York Times for backing up his predictions with bets.

It is, therefore, striking that the media is giving a great deal of credence of a recent poll of 31 economists about the chances of Scotland voting Yes in the upcoming referendum. Each economist gave a percentage estimate of the chances of a Yes vote in referendum, the median of which was 45%. Bloomberg, which normally carries high quality analysis of financial news, then reported that the chances of Scottish independence were 45%. This uncharacteristically bad news story is guilty of spurious precision. Are the chances really 45.0%!?!? Moreover, the odds of Yes vote being offered by prediction markets are about 25%.

Before be willing to trust the 31 unnamed  and mysterious experts over the prediction markets, I would like to know the following facts about them:

1) Where are they located? Do any live in the UK?

2) What are their qualifications for commenting on Scottish politics?

3) What stocks and bonds do they own? For full disclosure, let’s see their portfolios.

4) How many of these economists have visited Scotland? On average, how many days have they spent in Scotland in the last decade?

I’m not writing this post because I have a view one way or the other on Scottish independence. I’m writing it because I have strong views about the cult of the expert in our society.

P.S. The Betfair prediction market is already paying out on No bets.

Historian Kevin Tennent on the Economics of Scottish Nationhood

3 12 2009

Scotland's Flag

The British business and economic historian Kevin Tennent has published some thoughts about whether an independent Scotland would be a viable economic unit. On Monday, Scotland’s first minister announced that the country would soon be holding a referendum on independence. Monday was, of course, St Andrew’s day, the national day of Scotland– and the day of your humble narrator’s patron saint!

Tennent’s blog post draws on his extensive knowledge of Scottish, British, and global economic history. He begins his analysis with a discussion of the Darien scheme of 1690, the abortive attempt by Scotland to establish a colony in Panama. His blog post also pays attention to more recent developments. Dr Tennent writes:

“The collapse of Iceland’s banking system forced it to seek a £6bn emergency loan from the International Monetary Fund; unfortunately much of this will end up being spent recompensing savers abroad. Had Scotland been independent during the present crisis, then with RBS alone loosing around £24bn in 2008 the country would also have been driven to seek aid from the IMF; the whole of Scotland’s GDP was £86bn in 2006 (although this excludes oil and gas revenue). To cover this loss alone Scotland would have been forced to spend a more than a quarter of its GDP.”

This post should interest Canadians for two reasons. First, there is an obvious parallel between the question of Scottish independence and the separatist movement in Quebec. Would Quebec, which lacks North Sea oil, be a viable state? Second, there is the less obvious but even more important parallels between Scotland’s relationship with England and Canada’s relationship with its wealthy and populous southern neighbour. Most English-speaking Canadians would be in favour of Canada remaining independent of the USA. If they had an opinion on Scottish independence, it would probably be that Scotland should stay in the United Kingdom. Canadians are conservative in the deepest sense of the word and generally prefer to keep things as they are.   But we need to ask ourselves why, if independence is a good thing for Canada, would it be a bad thing for Quebec and Scotland?  What’s good for the goose may also be good for the gander.