Tuesday, May 15, 2007

More on weather markets and climate change

I wrote a couple of weeks ago about the possbility of long-term weather markets helping us to understand and prepare for climate change.

I've since found a smattering of information on this topic elsewhere, although not as much as I'd expect given the large amount of information on on prediction (or betting) markets for things like elections.

Some resources are:
  • Wandering a bit off-topic but a conceptually similar operational hurricane futures market allows meteorology researchers and students to invest real money ($5.00 - $500.00) in securities whose payoffs depend on where a given hurricane makes its first landfall. The prices of these securities is then used to forecast where a hurricane will actually land.
Also, on the subject of prediction markets, a number of prominent economists have advocated some changes to US online gambling laws to ensure that useful prediction markets can operate legally. The authors made these observations about the usefulness of prediction markets:
Prediction markets have already been used in a variety of contexts with remarkable success. For example, prices of economic derivatives predict economic variables better than professional economists; prices in Iowa political markets are typically more accurate than the polls in forecasting elections; and prediction markets at Hewlett-Packard Labs beat official forecasts of printer sales most of the time.

Prediction markets reflect an old thought that underlies the price system: Information is widely dispersed in society, and it is highly desirable to find a mechanism to collect and aggregate that information. These markets work for several reasons: First, almost anyone can participate. Second, people think hard when they have to back up their predictions with money; buy the right presidential contract and you win, buy the wrong one and you lose. Third, the profit motive encourages people to look for better information.

I'll keep following this theme on the blog. It seems to me that even a small betting market on long term temperatures (or associated climatic changes) could be a very cheap way to improve our understanding of climate change risks.


Biby Cletus said...

Cool blog, i just randomly surfed in, but it sure was worth my time, will be back

Deep Regards from the other side of the Moon

Biby Cletus

Grant said...

Hey David - have you read The Wisdom of Crowds? It covers the concept of prediction markets - mebbe not to the depth you have, but it's an useful starting point...

David said...

Hey Grant, I haven't but it's on my must-read-soon list!



Anonymous said...

A range of peer-reviewed articles about prediction markets can be found in the recently launched 'Journal of Prediction Markets' (www.thejpm.com). A free trial is available online.