Wednesday, October 1, 2008

Overcoming Bias

Intrade and the Dow Drop

With today's snapback, the Dow lost 777 and regained 485.

As of this evening, Intrade says the probability of a bailout bill passing by Oct 31st is 85%.

(777-485)/(1-.85) = 1,946. So a bailout bill makes an expected difference of 2000 points on the Dow.

Of course this is a bogus calculation, but it's an interesting one. Not overwhelmingly on-topic for OB, but it involves prediction markets and I didn't see anyone else pointing it out. I hope the bailout fails decisively, so this calculation can be tested.

1 comment:

  1. To call this calculation "bogus" is a huge understatement.

    On the other hand, noting that your post carried an Oct 1 date, and that Oct 1 is the 275th day of 2008 and Oct 31 is the 305th day of 2008, we have:
    (777 - 485)/(305 - 275) = 9.7, so the bailout will make an expected difference of about 10 points.

    Or should I have divided 305 by 275? That would give us 263 points.

    How about the weight of Hank Paulson and that of Nancy Pelosi?

    Ultimately, I guess, we should probably use the number of days since Bishop Usher created the world in 4004 B.C.E., at 10:00 A.M. Middle East Time...


Please post your comment(s) here. To reply to a specific comment, be sure to paste the appropriate @ displayed into the box below as the first line.