Who would he select as his running mate? It was the question observers of the American political scene had been asking ever since Willard Mitt Romney became the presumptive Republican nominee for President of the United States. Would he follow the 2008 Republican precedent in selecting a risky potential game-changer, or would he instead plump for a safe, established, mainstream choice?
Well, what would be the rational decision? That depends on whether you think you’re heading for the rocks or whether you believe you’re set fair if you just don’t rock the boat. In the first instance, a safe but unexciting choice might mean losing by less. In Presidential politics, however, there are no prizes for limiting the size of the loss. There is no such thing as keeping the deficit to manageable proportions. If you lose by one electoral vote, you may as well lose by a hundred. Put another way, in a state of the world where you are likely to go down by three or four points, volatility is very much your friend. It’s a state of the world where it’s rational to shake the dice. And for Governor Romney, it’s a state of the world which he currently inhabits. This is reflected in the betting markets which overall give him barely a one in three chance of taking the White House, and most sophisticated forecasting models, which tend to rate his probability of evicting President Obama even lower.
The problem for Romney, however, is that most of the dice he has to play with are loaded against him. All potential game-changers those with the purse-strings would allow him to select from are fraught with huge downside risk. And money has never mattered so much since the 5-4 decision of the US Supreme Court to allow so-called super PACs to allow billionaires and corporations to spend unlimited sums of money helping or hindering individual candidates, to the massive advantage of the Republican Party in general, and Mr Romney in particular.
Yet he is himself a very cautious politician by nature who would never have made John McCain’s mistake of choosing a maverick running mate with the potential to run out of control. For that reason, he was always likely to plead with his backers to be allowed a known quantity, unlikely to create any mayhem. That pretty much ruled out Governor Chris Christie of New Jersey, but just about pulls in Representative Paul D. Ryan of Wisconsin, the darling of Fox News, the broadcasting arm (in all but name) of the Republican Party.
So what is the downside risk with Mr Ryan?
It’s not difficult to state. He is simply the architect in chief of RyanCare, which is pretty much the idea that Medicare, Medicaid and Social Security should be slashed to the core to save money, which can be used instead to cut taxes on the richest in the country. It’s a policy which all the polling shows is overwhelmingly unpopular, and the more that people understand it, the less they like it. By raising Mr Ryan to the national stage, the presumptive Republican nominee has just ensured that RyanCare will be all too well understood by the American people by the time of the election.
More generally, various statistical measures (such as the well-recognised statistical system DW-Nominate) peg him as way to the right of even Dick Cheney and certainly the most conservative Republican member of Congress to be picked for the vice-presidential slot since at least 1900. He is also ranked as more conservative than any Democratic nominee was liberal, meaning that he is the furthest from the centre of the political spectrum.
So can Mr Ryan help win his home state of Wisconsin? That’s not impossible, but his net favourable rating in his home state is, according to the polling, just five points.
So what does he add?
He adds money, lots of it, from those with most to gain from RyanCare. And he adds spice to the Fox News cheerleading bandwagon. These are factors not to be under-estimated. Without them, Romney would be already sunk with no hope of re-surfacing.
It is probably a chance that Mitt Romney thinks worth taking, the best among the limited choices his backers would allow him. With hindsight, it was a choice which became almost inevitable as soon as the Supreme Court opened the floodgates to allow unlimited flows of money to the political stage.
Is it a strategy that will work? Can money buy any office, even the highest elected office of all? In November, we shall know the answer to that question.
The cross-party Commons Culture, Media and Sport Select Committee has now published its much anticipated report examining the way in which gambling is and should be regulated in the UK, under the title, The Gambling Act 2005: A Bet Worth Taking?
In short, the Committee recommends that any local authority be able to make its own decision as to whether or not they want a casino, rather than the decision being made by way of what they call “central diktat” – what others might call national planning. The Committee does recommend a role for central regulation, however, to ensure high standards of protection for the vulnerable, particularly children.
As John Whittingdale, the Chairman of the Committee, told the BBC Radio 4 Today programme, they still want national rules governing such things as the age-entry requirement for casinos, the number of machines and limits on stakes and prizes.
The Committee also recommends that the Department for Culture, Media and Sport should develop an information campaign on problem gambling, to be made available outside gambling premises. Moreover, the Committee argues for more research on problem gambling, particularly with regard to children, and a greater emphasis on discovering the most effective ways of educating children about the risks of gambling.
So far, relatively uncontroversial, one might argue. After all, why should one local authority be barred by national diktat from having a casino which the local residents broadly favour while a different local authority is allowed to have five? After all, the Committee is not in favour of abandoning national guidelines on the age of entry to these establishments, or even the number and type of machines they are permitted to house.
Much of the rest of the report also looks pretty uncontroversial. For example, they highlight the failure of the Department for Culture, Media and Sport to work with the Treasury and set remote gambling taxation at a level at which online operators could remain within the UK and be regulated by the Gambling Commission. This is pretty much common sense.
So is the report a pretty uncontroversial set of common sense recommendations? Broadly speaking, I would agree.
Where the Committee has pushed the envelope, though, is in its recommendations on the number of a certain type of machine allowed in betting shops and casinos. At present, high street betting shops are allowed a maximum of four B2 (FOBT) gambling machines, which offer a maximum £500 prize. The Committee says that casinos, the most highly-regulated sector, should instead be permitted to operate up to twenty B2-type gambling machines. Actually, they already are, it’s just that they usually prefer to use up their quota of machines with so-called B1 machines, with a much higher jackpot.
The Committee also found that limiting the number of B2 machines in betting shops has encouraged them to cluster in some high streets in order to satisfy customer demand. Local Authorities should have the power to allow betting shops to have more than the current maximum of four B2 machines per shop, the Committee argues, if they believe it will help to deal with the issue of clustering.
The reason this is so controversial is that there is a view prevailing in certain quarters that these particular machines are dangerous and highly addictive. They have been dubbed the ‘crack cocaine’ of gambling by certain newspapers, a term first coined by Donald Trump to describe a bingo-style game which offered competition to his casino portfolio.
If they are as dangerous as dubbed, of course, then they should not be allowed at all. Would we allow crack cocaine to be sold in supermarkets, as long as it is limited to just four shelves? Of course not! Casinos are in any case already allowed twenty much higher-prize machines than the B2 machines which the Committee is talking about.
So what is the evidence? The Gambling Commission has published a number of expert reports by leading experts in the field and the truth is that the evidence is just not there to ban these machines.
If we are not to ban them outright, how many should we allow? Is four the correct number that should be allowed in a casino or a betting shop, or should it be three or five, or two or six? If clustering is indeed taking place, as the Committee indicates may be the case, the current regulations might actually be leading to more B2 machines in total than would be the case if the rules were relaxed in terms of machines per establishment.
This is not to say that we should drop our guard with regard to the potential dangers from unregulated gambling, particularly unregulated online gambling. Australia is another example of a country where easy access to big-jackpot machines in the high street combined with complementary access to alcohol has created a culture of gambling we would be wise not to emulate. But the Committee is not recommending that we wander down either of these routes.
Before rising to cast stones at the recommendations of the Select Committee, therefore, we should pause to consider what they are saying. Whether we agree with all of it or not, ultimately we need to base our conclusions on the evidence, not on emotion.
It is a little over a week since the US Supreme Court delivered its landmark judgment on President Obama’s signature policy achievement in office so far, the Affordable Care Act, which extends medical insurance coverage to additional tens of millions of Americans as well as covering those with pre-existing conditions. It was an achievement made in the face of almost universal Republican opposition, and which at the time of its implementation was believed by almost every respected constitutional lawyer to be fireproof in terms of the law and the constitution. In modern America, however, what the courts, and in particular the Supreme Court, decide is lawful or constitutional has become increasingly unrelated to what mainstream legal and constitutional scholars would consider to be the case, and increasingly closely related to the political and partisan prejudices of those serving on the bench. To this extent, it is as if the modern US Supreme Court is made up of politicians dressed in legal robes. It is the reason that so many decisions which divide Democrats and Republicans in the Congress and the country so often end up split 5-4, between the five conservative justices and the four more liberal justices. Law decided on party lines! It was never made so obvious as when the Supreme Court in 2000 voted 5-4 to halt the recount in Florida and award the election to George W. Bush over Vice-President Gore. In that case, one of the justices, Antonin Scalia, had to perform the equivalent of legal gymnastics to explain why he was overturning the right of Florida’s Supreme Court to continue with the count while championing state rights to decide such things in every earlier case. When queried, he told dissenters to “get over it!” More recently the Court voted 5-4, in the Citizens United case, to allow corporations and other vested interests to spend as much as they liked to promote and attack the causes of particular candidates, a decision hugely beneficial to the Republican Party. As expected, the vote went 5-4 along usual party lines. So it was taken in many quarters as a given that the Supreme Court would go the usual 5-4 route to overturn the will of the President of the United States, the Senate and the US House of Representatives and vote to rule the whole of the health care reforms as unconstitutional. On Intrade, the betting market, the likelihood was trading at around 80% the day before the decision came down. In the event, the decision was 5-4, but to the anger and shock of a Republican Party accustomed to having the referee on their team, it went the other way. Chief Justice Roberts, an arch-conservative appointee of George W. Bush, voted to uphold the Affordable Care Act as constitutional, siding with the more liberal members of the court, albeit determining it legal only on the basis of the principles of the Government’s right to taxation, an apparent sop to the campaigning arm of the Republican Party. So why did he do it? Was it a decision based on a great respect for doing the right thing in terms of the law and the constitution? On past evidence, unlikely. Was it a growing concern that the Court was on the verge of at last being rumbled by the general public as the judicial arm of the Republican Party, in the same way that Fox News was a while ago rumbled as the party’s broadcasting arm. Perhaps. Was it because he thought it would energize the Republican base to come out in force to overturn the Act by ousting the President and his Democratic allies in Congress. More likely. Or was it because he feared the revenge of a re-elected Democratic President and Senate when the time should come to replace a number of the ageing justices on the court, maybe as many as three in the next four years. Most likely! In fact, the decision has so far served to boost the President in the post-judgment polling and betting. We now look forward to seeing how this plays out! It will be interesting.
Why are objects the size that they are? The answer is quite simple. It’s the size of the molecules and atoms that make them up.
But why is an atom the size that it is? That’s determined by the size of the orbits of the electrons around the atom, which in turn is determined by the mass of the electron. Smaller mass means smaller orbits, means smaller everything. But why is the electron the mass that it is? Indeed, why does it have any mass at all? In fact, theory dictates that for all the elementary particles that compose the atom to interact as they do, their masses should actually be zero.
So what’s happening? The neat solution proposed by Professor Peter Higgs would seem to have it all figured out. He suggests that there is a field which permeates space, which moving particles interact with, thus acquiring the appearance of mass. Imagine a weightless pea (if you can!) moving through treacle.
So does this field actually exist? Quantum theory tells us that fields are associated with particles (a thing called ‘wave-particle duality’) so there must be a particle complementary to the Higgs field. For example, the particle associated with the electromagnetic field is the photon. The particle is known as the Higgs boson, and a lot of time, money, energy and intellect is being applied to finding out whether this particle, and therefore whether the Higgs field, actually exists.
This is where the Large Hadron Collider comes in, built by the European Organization for Nuclear Research (CERN). It works by accelerating protons around a kind of 17-mile underground racetrack, in order to smash them together at astronomically high speeds, with the purpose of creating smaller bits of matter, one of which could be a Higgs boson. If created, it would exist for only a tiny fraction of time, but hopefully long enough to be detected.
Today it seems that the elusive boson, that Pimpernel of particles, has indeed been landed!
The declaration of support for gay marriage, recently articulated by President Obama, gratified some, astonished others, and drew both great praise and great condemnation. Was this a President demonstrating the moral courage to do what he believed right, or was it a political ploy driven by electoral expediency? Nobody can look into the soul of the President to answer that question for sure, but we can at least appeal to evidence to assess the real and potential impacts of the arguably unexpected announcement.
The immediate effect of this new stance, as reflected in the opinion polling, was mixed. Daily tracking polls by Gallup (2,2000 registered voters) and Rasmussen (1,500 ‘likely’ voters) offered conflicting evidence, with Gallup noting a small shift to President Obama and Rasmussen a bigger immediate shift to Governor Romney. If we want to artificially split the tie, we have a CBS News/New York Times call-back poll of 562 registered voters first interviewed on April 13-17 which indicated a small swing to Romney over the preceding month. When asked whether the declaration of support would make respondents more or less likely to vote for the President, the response was marginally negative, though not enough to worry his campaign. More significantly, perhaps, is the finding in this poll that a majority of the voting public (including 70% of self-declared ‘Independent’ voters) attributed the motivation of the announcement to political calculation.
If the public is right in this view, one might suppose that the President’s new position would lead to an uptick in expectations of an Obama victory this November. Yet I discern no evidence of this in either the polling or the betting. The polling, as explained, is at best a mixed bag, while the professional money, whether gauged by the action on the betting / trading exchanges (sometimes known as prediction markets) like Betfair and Intrade, or with bookmakers, moved noticeably, if nowhere near decisively, away from the Democrat. As of a week after the Obama announcement, the money flowing through Betfair still indicated about a 62 per cent probability of re-election for the President, similar to that given spread bookmaker, Sporting Index. Intrade had his chances down to 58 per cent. In each case, this is a few points down on the situation pre-announcement. To put this in context, Governor Romney was still given not a whole lot more than a 1 in 3 chance or so of being elected President, but these movements in what were previously pretty stable markets are certainly noteworthy.
So if the President’s declaration was borne out of political calculation, what was the calculation? For one explanation, we might look to that part of the equation which contains campaign funding. In particular, we might look at the relatively recent legalisation of SuperPAC money by the conservative majority on the US Supreme Court (in the ‘Citizens United’ decision), whereby individuals and corporations can channel unlimited contributions to groups working to promote particular political agendas, notably through negative advertising against opposition candidates.
The important point here is that the weight of SuperPAC money is expected to heavily favour Republican candidates in general and Governor Romney in particular. To this extent it is arguably no coincidence that the Supreme Court was divided 5-4 on ‘party’ lines on this issue. Either way, the decision does tend to force the hand of candidates to court money by appealing to the wealthiest members of a candidate’s political base, which sometimes entails drawing clearer and less nuanced distinctions than perhaps would otherwise be optimal political strategy. To this extent, there is an irony in that conservative legal opinion on campaign finance might have triggered the exact opposite of conservative lay opinion on the issue of gay marriage. Unless, that is, the consequence is the election of a candidate who backs the idea of a constitutional amendment to enshrine marriage as exclusively the preserve of a man and a woman. There is, of course, another explanation for the Obama declaration. Simply put, that there is still enough doubt about the electoral impact of the new stance on gay marriage to allow the President to engage in a bit of good old-fashioned leadership. Now that’s a radical thought!
The decision by Newton Leroy (‘Newt’) Gingrich to suspend his campaign, announced on 2 May, 2012, was a rational if belated response to the delegate and polling arithmetic. For suspension, read cancellation and we witnessed the end, in all but name, of the race for the Republican nomination. Step forward Mitt Romney, presumptive nominee of the Republican Party for President of the United States.
The departures of Santorum and Gingrich did not constitute the ideal scenario, of course, for an Obama campaign all too happy to see the Republican pack continue to spend huge sums tearing itself apart. So might we have expected Santorum’s and now Gingrich’s departure to cause something of a shift in the betting markets in favour of the former Governor of Massachusetts? Expect what you like, but in fact there was scarcely a ripple of interest. The inevitability of Romney as GOP nominee was already pretty much factored in, well before Santorum and Gingrich woke up to the inevitability of it all.
This is not to say that interest in the political markets was entirely unaffected. Instead attention turned to the former Governor’s next important decision. It is a decision which no Presidential nominee takes lightly, and which some have handled much better than others. It was the decision that probably won JFK the White House by delivering the South to the Democrats. It was also the decision which turned a little-known Governor of Alaska into at one point becoming the favourite in some books to stand a heartbeat away from the office of the Presidency of the United States. Mitt Romney will soon need to make this decision, to choose whom he wants on the ticket as his Vice-Presidential running mate.
The key question is whether he will follow the 2008 Republican precedent in selecting a potential game-changer or instead will he plump for an established, mainstream safe pair of hands? Well, if you’re heading for almost sure defeat, a safe but unexciting choice might mean losing by less. In Presidential politics, however, losing by one electoral vote produces the same outcome as losing by a hundred. Put another way, in a state of the world where you are likely to go down by three points, anything which shakes up the range of reasonable outcomes around this expectation is a bonus. When you are down, volatility is very much your friend. This was the probable rationale for the selection by John McCain of Sarah Palin.
So will Romney plough the same furrow as the man who beat him to the nomination in 2008? I tend to doubt it. The highly controversial 5-4 decision of the US Supreme Court to allow so-called “SuperPACs” to spend unlimited sums of money helping or hindering individual candidates is almost certainly to the advantage of the Republican party in general, and Governor Romney in particular. Money talks in a big way in US politics and the presumptive Republican nominee knows this very well. He has the confidence which the cushion of a lot of money to spend tends to give a candidate. He is also a very cautious politician by nature and will not want to risk losing an election which he believes he might win by choosing a maverick running mate who could so easily run out of control. I think that rules out surprise picks. Instead, Willard Mitt Romney is likely to choose a candidate who could potentially turn an important toss-up state into the probable column. Of all VP picks on the radar, that comes down to Senator Marco Rubio of Florida, Senator Rob Portman of Ohio and Virginia Governor Bob McDonnell. To this list, you might add Governor of Indiana Mitch Daniels, but if the election turns on Indiana, Mr. Romney has probably lost already.
The former Governor will also want a running mate who is a known quantity, who is likely to complement the man at the top of the ticket and is unlikely to rock the buttoned-up Romney campaigning style. This probably rules out Governor Chris Christie of New Jersey, but just about pulls in Congressman Paul Ryan of Wisconsin (though his is not really a swing state); Governor Daniels and Senator Portman also fulfil this category.
Now solve the simultaneous equation and we have a candidate who might just fit the bill.
Is the Ohio Senator just the ticket for Mr. Romney? Or are we all in for a Palin-type surprise?
We shall see.
Derren Brown, the illusionist, is no stranger to the use of the idea of the wisdom of crowds as part of his entertainment package. A few years ago, for example, he selected a group of people and asked them to estimate how many sweets were in a jar.
All conventional ‘wisdom of crowds’ stuff, albeit wrapped as part of a magical mystery tour. His relatively more recent venture into this world of apparent wisdom went down a rather singular avenue, however, as he explained how a group of 24 people could predict the winning Lottery numbers with uncanny accuracy.
The idea in essence was that each of the 24 would make a guess about the number on each ball and the average of each of these guesses would converge on the next set of winning numbers. It appeared to work – but that is the thing about illusionists; they are good at producing illusions.
I will not go into how he did generate the effect of predicting the lottery draw, because there is no point if you already know, and because it would spoil the fun if you don’t. What is sure, however, is that the musings of the crowd had nothing to do with it.
But why not? After all, if the crowd can accurately guess the weight of an ox or the number of jelly beans in a jar, why not the numbers on the lottery balls? The simple answer, of course, is because the lottery balls are drawn randomly. And the thing about random events is that they are unpredictable. This is at the heart of what economists term ‘weak form market efficiency’, i.e. that future movements in market prices cannot be predicted from past movements. In this sense, the series has no memory.
So what is likely to happen if you do get a group of friends around and ask each to choose six numbers for the next Lottery draw? If you take the average of these numbers, my best estimate is that you are likely to end up with a prediction for each ball that is about 30 or probably less. Why so? Partly this is because averaging a large number of selections is likely to produce a number somewhere nearer the mid-point of the set of numbers than the extremes, but also because birthdays are particularly popular numbers.
But if you do use popular numbers (birthdays and numbers which form a simple pattern on the ticket) and just happen to win, you’re likely to be sharing your winnings with a lot of other people who’ve chosen the same numbers as you. The better strategy is to populate your ticket with bigger numbers, and to avoid neat patterns.
This strategy won’t alter your chance of winning but it will increase how much you can expect to win if you do win. And that is no illusion!
These are the markets which accurately predicted the winner of every single state in the 2004 US Presidential election and the winner of every single contested state in the 2006 US Senate elections. These are the markets which said that Barack Obama would win the Iowa caucuses comfortably, as would Mike Huckabee. These are the self-same markets which forecast a handsome victory for John McCain in New Hampshire at the same time as the polls and pundits were declaring the race too close to call.
And yet the markets showed not a clue that Hillary Clinton would overcome the momentum of the charismatic Senator from Illinois, but instead declared the race for Obama with the same confidence as the media and the exit polls. Indeed, it took something of an avalanche of real results showing the former First Lady handily ahead before the baton of market favouritism changed hands.
So what happened?
The conventional wisdom is that the models used by the pollsters under-estimated the turnout of female voters by a significant factor. In the event, women, who make up 57 per cent of the New Hampshire electorate, went for Hillary by a margin of 12 clear points, in contrast to Iowa where she lost the female vote by five.
It was the tears that did it, came the familiar cry. Not so, in my opinion. The defining moment for me came in the final debate when the New York Senator was asked a question about a likeability problem. Her response – “Well, that hurts my feelings!” was funny, warm and engaging, only to be interrupted by a curt “You’re likeable enough” from Mr. Obama. In his defence, the apparently dismissive tone in which the words were delivered was probably unintentional. But the damage was done.
It was what those familiar with Hillary history call the “Rick Lazio moment”, when her Republican Senate opponent in the 2000 New York campaign marched across the stage at her during a debate and demanded she sign a pledge card he brandished in her face. Instantly Lazio turned off a good proportion of New York’s women voters, and a not insignificant number of the men.
It all goes to show that the markets are usually a much more accurate predictor of election outcomes than are the polls, but there are times when those trading the markets are a little too dependent on charting and interpreting the numbers. Sometimes voters are motivated by factors which cannot be reduced to raw numbers. Those who are wise to this when it occurs stand to make a lot of money. As time would tell!
When asked to list my all-time heroes, the name of William of Ockham (or Occam) is never far from my lips. Born in the late 13th century, in the Surrey village of Ockham, this Franciscan philosopher, theologian and political writer, is generally considered to be one of the major figures in medieval scholarship.
In this regard, he ranks alongside the likes of his fellow theologians Thomas Aquinas and John Duns Scotus in the pantheon of great pre-Renaissance thinkers. Despite the title he earned at Oxford University of Venerabilis Inceptor (‘Worthy Beginner’) it is therefore by his alternative title of Doctor Invincibilis (‘Unconquerable Doctor’) that he comes down to us. Of all his writings, and they are each worthy of separate study, it is for his principle of parsimony in explanation and theory-building that he is best known today. It is a principle that Fox Mulder refers to in an episode of the X-files and that Jodie Foster defers to in ‘Contact’. Indeed, in William Peter Blatty’s novel, Legion (on which ‘The Exorcist III’ is based), the lead character complains that he was not put on earth “to sell William of Occam door to door.” He needn’t have bothered. William of Ockham sells himself well enough without help, through the principle that is known as ‘Occam’s Razor.’
The Razor is perhaps most clearly defined in Encyclopedia Britannica’s Student edition, where it is taken as an admonishment to devise no more explanations than necessary for any given situation. Put another way, it advises that one should opt for explanations in terms of the fewest possible number of causes, factors or variables. The adults’ version of Encyclopedia Britannica puts it more elegantly, but perhaps less clearly, in these terms – ‘Pluritas non est ponenda sine necessitate’ (‘Plurality should not be posited without necessity’). As such, the principle can be interpreted as giving precedence to simplicity; of two competing theories, the simplest explanation of an entity is to be preferred. There are some higher truths, which may be known to us by experience or revelation, and which Ockham witnesses as necessary rather than contingent entities, to which we are not advised to apply the razor. This is a part of Ockham’s trenchant analysis which is often forgotten, but at least need not concern us when considering the theme of today’s article.
So how do modern-day sports forecasters stand on the shoulders of this medieval giant? The best explanation is perhaps by way of example, and for this we need to travel to the Hong Kong racetrack and to the professional gamblers who devise sophisticated forecasting models of the outcomes of the races run at the Sha Tin and Happy Valley tracks. The basic methodology is to identify each individual factor that could possibly predict the outcome. And what do you do then? How do you decide what to include and what not? For the answer I asked a man who has conservatively made tens of millions of dollars at the track from this very approach. As we enjoyed the view from his Sydney penthouse, he summed it up in a sentence. “I apply Occam’s Razor”, he said, “it really is as simple as that!”
When Alice journeyed through the looking glass, Lewis Carroll tells us, she came across a Queen who claimed to be “one hundred and one, five months and a day.” “I can’t believe that!” said Alice. “Can’t you?” the Queen said in a pitying tone. “Try again: draw a long breath and shut your eyes.” Alice laughed. “There’s no use trying”, she said: “one can’t believe impossible things.” “I daresay you haven’t had much practice,” said the Queen. “When I was your age, I always did it for half-an-hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.”
Well, there’s not space enough to consider six impossible things here, but let’s think of one, and it’s a big one. It’s the idea that market prices, be it the stock market or the Betfair market or any other person-to-person betting market, already incorporate and fully reflect all available information. And so you can’t beat the market, unless you get lucky. Economists call this idea the ‘efficient market hypothesis’ and such a world as ‘informationally efficient.’
Now there’s a problem with this ‘looking glass’ world because in it nobody has an incentive to gather information. Why? Because information acquisition is costly and would add nothing to what can be obtained by simply looking at market prices. But if nobody acquires costly information, no trading will take place. And if nobody trades, what drives the market prices to incorporate and reflect all available information, i.e. what keeps the markets efficient? It’s called the ‘information paradox’, first formalized in a paper published by Sanford Grossman and Joseph Stiglitz in 1980, called ‘On the Impossibility of Informationally Efficient Markets.’ The same applies if information is costless to obtain but there are trading costs. In the real world, of course, there are both information and trading costs, and we have a paradox in spades. But still we are told that the market is informationally efficient. Welcome to the looking glass world of modern financial economics!
So is there a solution to the paradox? Consider the case of a betting market about the age of the looking glass queen. Let’s say nobody knows but lots of people are making guesses, some better informed than others, and betting looking glass money on the basis of these guesses. The queen just hasn’t been telling. Now she has told Alice, and the market will be settled later in the day when she tells the same to the whole world, one in which impossible things really are believed. Well, Alice has a little bit of time to place her bets before the rest of the world get to know the truth and if she’s clever she’ll bet enough to drive the market to the conclusion that the queen really is one hundred and one, five months and a day. And when the queen announces this is so, everyone will believe her. Alice will be rich, in a looking glass kind of way, and the queen will be not a day older. And the market will be efficient once again! And I think to myself, What a Wonderful World!
Professor Leighton Vaughan Williams 