Sometimes a small error can make a big difference.
Last week Paul Kedrosky at Infectious Greed, one of our featured blogs, wrote a short piece on recession probability with the following title:
"Probability of U.S. Recession in 2008"
He wrote about the recent Wall Street Journal survey of economists, noting that the overall estimate of a recession had increased and the range of probabilities was extreme. His key comment:
Three-quarters of the 52 economists surveyed put the odds at or above 30%, but the range was gigantic from 5% to 90%.
This obviously means that one-quarter of economists see the probability as lower than 30%, but we have no quarrel with the overall conclusion that the (planned) slowing of the economy has increased the chance of a recession, probably into the 30% range.
Paul goes on to cite the recession probability from Intrade, a prediction market. We think prediction markets are useful and agree with Paul that Intrade is the best, but care is required in using the information. The 2008 recession contract has not yet attracted much interest and trading is thin. You can see the order book here. As we write this, the inside market shows a 52 bid for 16 contracts and a 58 offer of 9 contracts. A contract settles at either zero or 100, so the price can be interpreted as the probability of the outcome on a percentage scale. The contracts settle for a full value of $10. This means that the best current bidder is risking about $83. Looking only at orders already in the book, someone with $2000 could send the price to 30 or to 90. Presumably this would attract new orders, but the point is clear. This contract would be more meaningful if there were a tighter and deeper market.
We had marked Paul's original article for comment because of the disparity between the predictions of economists and non-economists, in this case the bettors at Intrade, a theme we described discussed here.
Much to our surprise, this morning's email alert from Seeking Alpha showed the same article with the following incorrect headline:
"Economists: Probability of U.S. Recession in 2008 Almost 60%"
The editors at Seeking Alpha are very good. On articles they pick up from "A Dash" their headline is often different and usually better than our original. In this case, however, the headline is an unfortunate and misleading error. Paul Kedrosky is a much respected and popular writer, so the story will get a lot of attention. How many readers will notice that the description in the text does not match the headline?