Economic Darwinism: Who has the Best Probabilities?
AbstractSimulation evidence obtained within a Bayesian model of price-setting in a betting market, where anonymous gamblers queue to bet against a risk-neutral bookmaker, suggests that a gambler who wants to maximize future profits should trade on the advice of the analyst cum probability forecaster who records the best probability score, rather than the highest trading profits, during the preceding observation period. In general, probability scoring rules, specifically the log score and better known â€œBrierâ€\x9D (quadratic) score, are found to have higher probability of ranking rival analysts in predetermined â€œcorrectâ€\x9D order than either (i) the more usual method of counting categorical forecast errors (misclassifications), or (ii) an economic measure of forecasting success, described here as the â€œKelly scoreâ€\x9D and defined as the trading profits accumulated by making log optimal bets (i.e. Kelly betting) against the market maker based on the probability forecasts of the analyst being assessed. This runs counter to the conventional wisdom that financial forecasts are more aptly evaluated in terms of their financial consequences than by an abstract non-monetary measure of statistical accuracy such as the number of misclassifications or a probability score. Copyright Springer 2007
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Springer in its journal Theory and Decision.
Volume (Year): 62 (2007)
Issue (Month): 1 (February)
Contact details of provider:
Web page: http://www.springerlink.com/link.asp?id=100341
bid-ask spread; economic forecast evaluation; Kelly criterion; probability forecasting; probability scoring rules; Kelly score; C11; C44; D40; D81; C52; G11;
Find related papers by JEL classification:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- De Long, J Bradford, et al, 1991.
"The Survival of Noise Traders in Financial Markets,"
The Journal of Business,
University of Chicago Press, vol. 64(1), pages 1-19, January.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1988. "The Survival of Noise Traders in Financial Markets," NBER Working Papers 2715, National Bureau of Economic Research, Inc.
- De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1991. "The Survival of Noise Traders in Financial Markets," Scholarly Articles 3725470, Harvard University Department of Economics.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann,, . "The Survival of Noise Traders in Financial Markets," J. Bradford De Long's Working Papers _123, University of California at Berkeley, Economics Department.
- De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990.
"Noise Trader Risk in Financial Markets,"
3725552, Harvard University Department of Economics.
- Michael P. Clements, 2004. "Evaluating the Bank of England Density Forecasts of Inflation," Economic Journal, Royal Economic Society, vol. 114(498), pages 844-866, October.
- Larry Blume & David Easley, 2001.
"If You're So Smart, Why Aren't You Rich? Belief Selection in Complete and Incomplete Markets,"
Cowles Foundation Discussion Papers
1319, Cowles Foundation for Research in Economics, Yale University.
- Lawrence Blume & David Easley, 2006. "If You're so Smart, why Aren't You Rich? Belief Selection in Complete and Incomplete Markets," Econometrica, Econometric Society, vol. 74(4), pages 929-966, 07.
- Lawrence Blume & David Easley, 2001. "If You're So Smart, Why Aren't You Rich? Belief Selection in Complete and Incomplete Markets," Working Papers 01-06-031, Santa Fe Institute.
- Kraus, Alan & Litzenberger, Robert H, 1975. "Market Equilibrium in a Multiperiod State Preference Model with Logarithmic Utility," Journal of Finance, American Finance Association, vol. 30(5), pages 1213-27, December.
- Chakravarty, Sugato, 2001.
"Stealth-trading: Which traders' trades move stock prices?,"
Journal of Financial Economics,
Elsevier, vol. 61(2), pages 289-307, August.
- Sugato Chakravarty, 2002. "Stealth-Trading: Which Traders' Trades Move Stock Prices?," Finance 0201003, EconWPA.
- Clemon, Robert T & Winkler, Robert L, 1986. "Combining Economic Forecasts," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(1), pages 39-46, January.
- Markowitz, Harry M, 1976. "Investment for the Long Run: New Evidence for an Old Rule," Journal of Finance, American Finance Association, vol. 31(5), pages 1273-86, December.
- Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
- Gray, Philip K & Gray, Stephen F, 1997. " Testing Market Efficiency: Evidence from the NFL Sports Betting Market," Journal of Finance, American Finance Association, vol. 52(4), pages 1725-37, September.
- Hakansson, Nils H., 1971. "Capital Growth and the Mean-Variance Approach to Portfolio Selection," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 6(01), pages 517-557, January.
- Barclay, Michael J. & Warner, Jerold B., 1993. "Stealth trading and volatility : Which trades move prices?," Journal of Financial Economics, Elsevier, vol. 34(3), pages 281-305, December.
- Cain, Michael & Law, David & Lindley, Dennis, 2000. " The Construction of a Simple Book," Journal of Risk and Uncertainty, Springer, vol. 20(2), pages 119-40, March.
- Lawrence E. Blume & David Easley, 1997.
"Optimality and Natural Selection in Markets,"
GE, Growth, Math methods
9712003, EconWPA, revised 09 Jul 1998.
- Dixon, Mark J. & Pope, Peter F., 2004. "The value of statistical forecasts in the UK association football betting market," International Journal of Forecasting, Elsevier, vol. 20(4), pages 697-711.
- L. C. MacLean & W. T. Ziemba & G. Blazenko, 1992. "Growth Versus Security in Dynamic Investment Analysis," Management Science, INFORMS, vol. 38(11), pages 1562-1585, November.
- R. Winkler & Javier Muñoz & José Cervera & José Bernardo & Gail Blattenberger & Joseph Kadane & Dennis Lindley & Allan Murphy & Robert Oliver & David Ríos-Insua, 1996. "Scoring rules and the evaluation of probabilities," TEST: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer, vol. 5(1), pages 1-60, June.
- Forrest, David & Goddard, John & Simmons, Robert, 2005. "Odds-setters as forecasters: The case of English football," International Journal of Forecasting, Elsevier, vol. 21(3), pages 551-564.
- Francis X. Diebold & Jinyong Hahn & Anthony S. Tay, 1999. "Multivariate Density Forecast Evaluation And Calibration In Financial Risk Management: High-Frequency Returns On Foreign Exchange," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 661-673, November.
- Robert Nau, 2001. "De Finetti was Right: Probability Does Not Exist," Theory and Decision, Springer, vol. 51(2), pages 89-124, December.
- Hvattum, Lars Magnus & Arntzen, Halvard, 2010. "Using ELO ratings for match result prediction in association football," International Journal of Forecasting, Elsevier, vol. 26(3), pages 460-470, July.
- Lessmann, Stefan & Sung, Ming-Chien & Johnson, Johnnie E.V. & Ma, Tiejun, 2012. "A new methodology for generating and combining statistical forecasting models to enhance competitive event prediction," European Journal of Operational Research, Elsevier, vol. 218(1), pages 163-174.
- Victor Jose, 2009. "A Characterization for the Spherical Scoring Rule," Theory and Decision, Springer, vol. 66(3), pages 263-281, March.
- Grant, Andrew & Johnstone, David, 2010. "Finding profitable forecast combinations using probability scoring rules," International Journal of Forecasting, Elsevier, vol. 26(3), pages 498-510, July.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F. Baum).
If references are entirely missing, you can add them using this form.