Wednesday, November 09, 2011

How prices are useful

One frustration I have watching the news is the media's incessant obsession with political polls.  For example, Herman Cain has been showing an approval rating just under Mitt Romney's, which you hear regurgitated every night as "he could be the Republican nominee."  The problem is, we have a better predictor out there of people willing to put their money where their mouth is.

Herman Cain as the GOP nominee is currently trading at  $0.45/share on InTrade, meaning the market gives him a 4.5% chance.  Compare that to Mitt Romney's 68% probability. When I point that out to people, I sometimes hear "Yeah, but the market doesn't know what will happen between now and next summer; markets aren't efficient," etc. etc.  One guy told me "I'd rather listen to the people at 538, because at least they have a proven track record..." He doesn't realize that that is the exact same thing as saying you believe a particular investment advisor that a certain stock is underpriced.  If it's really true, then buy the stock and get rich.

If you think Cain has a decent shot at the nomination then the market says you stand to make a good deal of money by betting on him. And if everyone else feels the same way, they will too, otherwise they're leaving free money on the table.  Once you put your money where your mouth is with everyone else, Cain's value will rise.   The fact that no one is doing that indicates that they don't actually think it will happen.  Prices are very useful things. Why the nightly news show us the Dow and S&P, and sometimes talk about bond yields, but focus on polls rather than market indicators for politics is a mystery to me.

No comments: