OK, a last thought on the development initiatives and markets thread: let’s leave the predictive markets thing aside for the moment, and get to what I think is a more serious question for development initiatives – do we use all the information we might to evaluate the likely impact of our programs? I think a lot of folks misread the intent of my initial post – I was NOT suggesting we bet on mortality rates and other direct measures of project effectiveness. That is something I could see as an academic exercise, but is way too morbid for my tastes, even in that setting.
But everyone who lunged in that direction seemed to miss the point that any major development initiative will, if it succeeds, have radiating impacts through different markets. That is, a successful food security initiative will change harvest sizes of different crops, thereby influencing commodities markets. A successful public health intervention might increase the size of the workforce, or its efficiency. And so on. My simple thought was that any fund investor worth his/her salt should be examining these initiatives and their expected outcomes to decide 1) if the initiative worked, what markets might be affected, how and when and 2) do they think the initiative will actually work.
If there is no movement around these initiatives, it seems to me that these two factors might be important – at the first step in this decision-making, investors might decide that in the event of a successful intervention, the markets affected might not be accessible or profitable, or the timeframe of any movement in the market might be so long as to make immediate response unnecessary. Thus, we would see no market response to the announcement of an intervention. At that point, it doesn’t matter if the intervention will work or not – that assessment never comes into the picture.
However, in at least some cases, I have to think that there are initiatives out there (in a world of rising food prices, I am a bit fixated on food security at the moment) that would affect significant markets, and not only at a national scale (where markets might be illiquid or otherwise inaccessible). Take the case of cocoa and Cote d’Ivoire this past winter: the civil conflict in CIV cut off a significant amount of global supply, and futures markets got skittish over the further constriction of trade, driving cocoa prices upward. This is a niche crop, heavily produced by only a few countries, but the price movement could have meant big dollars for a fund that correctly anticipated this trend. Surely there are (or will be) food security initiatives that could similarly affect the overall supplies of and access to particular (perhaps niche) crops for entire regions, or even shift global availability/perception enough to shift commodities prices in much larger, more transparent markets in the short term. Don’t fixate on national markets for these initiatives – what about really big development movers that could affect global supplies of grain in an era where all the slack has been taken out of various global grain markets? You can’t tell me that everyone at these trading desks is simply ignoring the food security world . . . surely they are at least assessing through step 1) above. So if there is no market response to these initiatives, either the timeframe of movement is too distant to warrant interest, or the traders simply don’t think these initiatives will succeed enough to significantly influence the markets in which they trade. Perhaps the price of oil and its impact on transport is much, much more important than increasing harvest size when it comes to shaping food commodities prices . . . in which case, it would probably be good for those designing food security initiatives to know this at the outset and address it in project design (for example by thinking about transportation issues as integral to the initiative).
Of course, there is option 3): traders have no idea what sorts of initiatives are out there, and are operating in ignorance of these potential large drivers. This is entirely possible, but a bit hard to believe . . .
Tag: prediction markets
Quick thought: clarifying the development initiatives and markets post
Lots of comments pouring in via twitter regarding my earlier post on development initiatives and markets. First, I found it interesting that readers went in two directions – they either took the post to be about prediction markets alone, or they caught the reference to hedge funds and realized that I was talking about “betting” in a much more general sense: that is, in the sense of hedge fund investment, which is really a set of (ideally) well-researched, carefully-hedged bets on the direction of particular stocks, commodities and sometimes whole segments of the market.
For now, let’s take up the issue of predictive markets. I love Bill Easterly’s response tweet, asking what development initiative I (or anyone else) would bet my own money on. I think prediction markets are interesting tools. They are hardly perfect, as like other markets they are subject to bubbles and manipulation, but there is some evidence to suggest that they do yield interesting information under the right conditions. It would be interesting to set up parallel prediction markets, and populate one with development professionals at agencies and NGOs, one with development academics, and one that blends the two, and then have them start to buy and sell the likelihood of success (as defined by the initiative, both in terms of outcomes and timeframe) for any number of development initiatives. While I doubt these parallel markets would move in lockstep, I wonder if they would come to radically different assessments of these initiatives. And we could examine how well they worked as predictive devices. I’m pretty sure most academics would have started shorting the Millennium Village Project at its inception (academic paper here) . . . so what things would the development blogosphere/twittersphere short today? What would you go long on (that is, what would you hold in the expectation it would meet expectations and rise in value)? Have at it in the comments . . .
I’ll address the wider meaning of “betting” that I was also aiming at later . . .