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November 01, 2005

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The Law Fairy

The idea of a market forecasting contingent nominations and similar political happenings is both interesting and troubling. How might such a market have a, if you will, Heisenberg-esque effect on the very events it predicts? Much like stock market tamperers (as we've seen recently with Martha Stewart and the like) can through calculated mis-information *cause* the events they predict, might not a market like the one you hypothesize in effect create the very news it seeks to predict? One could, of course, make the argument that such things already occur -- I was particularly intrigued by Professor Sunstein's recent post about information cascades.

Even if the market could somehow be regulated to try to prevent tampering, couldn't even legitimate market participants affect the course of events? If so, is this something we would want to encourage or discourage? I'm wary, particularly keeping in mind that those with the greatest ability to dominate such markets tend also to have vested interests in the outcomes they research.

Eh Nonymous

I was fascinated to see SDO'C's contingent resignation, as it brought home an important point:

While the method appointment of Justices is constitutionally determined, and similarly of their (involuntary) removal, the mechanics of their resignation and replacement are less fixed.

There are rules - Supreme Court rules? Federal rules? - about when a Justice is given that spare office, how many clerks they get, how much pay and for how long, and when the other perks of office do and don't apply.

I could imagine a highly choreographed contingent resignation, involving the stock market, the identity of the person in office, the identity of the replacement nominee, the house the Moon is in, and whether a majority of the sitting Court approves. Is it unconstitutional? Well, the Senate and President have no power to fill a vacancy that doesn't exist, and the sitting Justice has all the power to create that vacancy if they want.

So, why not?

FXKLM

The interesting thing about a conditional resignation with a time limit is that it completely changes the incentives for obstructing nominees in the Senate. With O'Connor's conditional resignation, Democrats have very little incentive to vote against reasonably moderate nominees. Even if they manage to block one nominee, the next one will be chosen by Bush also. Since Democrats can't seriously hope to delay the process until 2009, the benefits of obstruction are limited.

But imagine that Justice Stevens offers to resign contingent on a successor being named within two months. Democrats would probably be able to filibuster until the deadline expired without paying too high a political price. If Bush couldn't get someone confirmed in time, he would lose the opportunity to replace Stevens, but Democrats would run the risk that Stevens would either die or retire without such a contingency under a Republican administration.

I think that's probably a more plausible scenario than setting a deadline that coincides with a presidential election. It's less obviously political, and the sitting justice could plausibly claim that he or she wants to avoid a long, ugly confirmation battle. I'm not sure how it would play out, but it would definitely be interesting.

MMJ

Given that Supreme Court nominations, Supreme Court confirmations, and Supreme Court deliberations are governed by strategies to advance political ideology, it shouldn't seem so unusual that Supreme Court resignations could also be governed by such considerations.

But, I think there's a huge difference between resignation contingent on [the Senate's] confirmation of a successor, and resignation contingent on [the Justice's] approval of a successor. Resignation contingent on approval would, in effect, create an added step in the selection process, one I'm guessing is not mentioned in the Constitution.

It might have to be decided by the Supreme Court. I honestly wonder how they'd vote.

Jason Ruspini

Law Fairy, You bring four separate questions to mind:

1) What is the influence of manipulators on price?

See Hanson and Oprea's "Manipulators Increase Information Market Accuracy" http://hanson.gmu.edu/biashelp.pdf , one of the most interesting papers on prediction markets. They use a micromarket model to show that a manipulator's price bias, if known, has little effect on market prices, but variance in the manipulator's bias can actually increase accuracy, by enticing more liquidity. As with all models, there are many assumptions here and the ones I note relate to the sizes of various traders' budgets and their risk-appetites. What about cases where there is a natural imbalance due to external factors? If some traders are risk-averse, they may make trades in a specific market for reasons other than their best estimate of price. If they have relatively large budgets, this could go on for some time.

2) What is the influence of insiders on both price and outcome?

A problem in any market, but much more so in markets such as those linked to terrorist-related events, *where anyone could become an "insider."* In those cases the settlement process would have to be especially rigorous, and this would be advertised beforehand. In cases where outcomes are determined by a small pre-defined group, the insiders can more easily be excluded from the market. (Prediction markets can be unreliable in these cases, especially when there is a semi-open set of possible outcomes, e.g. a list of candidates for some office. -- and note the Alito leak.)

3) What is the influence of price on price?

How prevalent is feedback and momentum trading? Is this "noise" normally distributed? How to distinguish serial correlation caused by such trading with moves caused by sustained changes in "fundamentals"?

4) What is the influence of price on actual outcome?

Why I placed "fundamentals" in scare quotes above..
This is the most difficult and interesting of the questions. Nash inflation comes to mind, and of course, Soros' theory of reflexivity. *When you separate this question from #2 above, it doesn't seem as scary though, does it?*

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