Crowdsourcing the unemployment rate

What's inflation going to be? Wanna bet?

"Wisdom of the crowds" is a pretty solid phenomenon. Ask a thousand people to guess the number of sweets in a jar, and the average (mean) of their guesses tends to be damn close to the actual number.

What's more interesting is whether the same idea works, not just to guesses, but to forecasts. Specifically, economic forecasts. If you ask a thousand people to guess what the unemployment rate will be in two years time, how will they do?

There are certainly reasons to be hopeful. Information is widely distributed, with little advantage accruing to experts; and in fact, unlike with simply counting sweets, there's likely to be a fair few people with "inside" information (hiring plans, perhaps, or a feel for how their sector is moving), which they may use to inform their guesses. Mix together enough guesses, and you could generate insight.

That's what the Adam Smith Institute and Paddy Power are hoping; the two have teamed up to offer markets in key UK economic statistics. You'll be able to bet on what the rate of inflation and unemployment will be in June 2015; the ASI's Sam Bowman writes that:

By combining the local knowledge of thousands of people, betting markets can outpredict any panel of experts. If these markets catch on, the government should consider outsourcing all of its forecasts to prediction markets instead of expert forecasters.

But there may still be some problems, both with the idea and its implementation.

Betting markets are indeed a theoretically great way of harnessing the wisdom of the crowds. As Bowman writes, the fact that people put money on their predictions means that more confident predictions are weighted higher, and vice versa. But the necessity of teaming up with a bookmaker to launch the idea means that there is a major distortion: the odds the bookie has set. Punters can get 7/2 that inflation will be greater than 5 per cent, and just 5/2 that it will be between 4.01 per cent and 5 per cent. That means that someone who thinks that inflation is most likely to be around 4.75 per cent may take advantage of the higher odds offered if they guess slightly higher. It also means that what Paddy Power think is most likely will skew the guesses.

A better version of the same idea would be to create a prediction market. The difference between the two is that in a market, the crowd takes the role of bookmaker as well as punter. The odds themselves get set procedurally, based purely on where people are betting, and so there's no chance of a bad guess on the bookies' part skewing the predictions.

But even if the market was designed to perfectly get the true thoughts of everyone in the crowd, there's still reasons to doubt that it can be that good at forecasting economic data.

There's quite a specific set of conditions which are required for crowdsourcing to work. James Surowiecki, who coined the phrase "wisdom of crowds", describes four: Diversity of opinion, independence of opinion, decentralisation of action, and aggregation of information. Of those, the one which is the most problematic in this case is independence. People's guesses aren't secret, and they affect others. That means you could end up seeing a circular mill, where everyone reinforces everyone else's beliefs to the extent that the crowdsourcing breaks down. Think: do you hold your beliefs about what might happen to the unemployment rate based on investigation of the primary data, or based on collation of expert analysis? If it's the latter, you'd be a net harm to the crowdsourcing, contributing largely to the flocking problem.

It would still be nice to get more financial bets. But that's mostly so that I could join in my sportier friends in having something where I feel like my expertise could win me a bit of cash; when it comes to actually trying to work out what will happen, we might have to stick with older methods.

Mark Carney. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
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The campaign to keep Britain in Europe must be based on hope, not fear

Together we can show the world a generous, outward-facing Britain we can all be proud of.

Today the Liberal Democrats launched our national campaign to keep Britain in Europe. With the polls showing the outcome of this referendum is on a knife-edge, our party is determined to play a decisive role in this once in a generation fight. This will not be an easy campaign. But it is one we will relish as the UK's most outward-looking and internationalist party. Together in Europe the UK has delivered peace, created the world’s largest free trade area and given the British people the opportunity to live, work and travel freely across the continent. Now is the time to build on these achievements, not throw them all away.

Already we are hearing fear-mongering from both sides in this heated debate. On the one hand, Ukip and the feuding Leave campaigns have shamelessly seized on the events in Cologne at New Year to claim that British women will be at risk if the UK stays in Europe. On the other, David Cameron claims that the refugees he derides as a "bunch of migrants" in Calais will all descend on the other side of the Channel the minute Britain leaves the EU. The British public deserve better than this. Rather than constant mud-slinging and politicising of the world's biggest humanitarian crisis since the Second World War, we need a frank and honest debate about what is really at stake. Most importantly this should be a positive campaign, one that is fought on hope and not on fear. As we have a seen in Scotland, a referendum won through scare tactics alone risks winning the battle but losing the war.

The voice of business and civil society, from scientists and the police to environmental charities, have a crucial role to play in explaining how being in the EU benefits the British economy and enhances people's everyday lives. All those who believe in Britain's EU membership must not be afraid to speak out and make the positive case why being in Europe makes us more prosperous, stable and secure. Because at its heart this debate is not just about facts and figures, it is about what kind of country we want to be.

The Leave campaigns cannot agree what they believe in. Some want the UK to be an offshore, deregulated tax haven, others advocate a protectionist, mean-hearted country that shuts it doors to the world. As with so many populist movements, from Putin to Trump, they are defined not by what they are for but what they are against. Their failure to come up with a credible vision for our country's future is not patriotic, it is irresponsible.

This leaves the field open to put forward a united vision of Britain's place in Europe and the world. Liberal Democrats are clear what we believe in: an open, inclusive and tolerant nation that stands tall in the world and doesn't hide from it. We are not uncritical of the EU's institutions. Indeed as Liberals, we fiercely believe that power must be devolved to the lowest possible level, empowering communities and individuals wherever possible to make decisions for themselves. But we recognise that staying in Europe is the best way to find the solutions to the problems that don't stop at borders, rather than leaving them to our children and grandchildren. We believe Britain must put itself at the heart of our continent's future and shape a more effective and more accountable Europe, focused on responding to major global challenges we face.

Together in Europe we can build a strong and prosperous future, from pioneering research into life-saving new medicines to tackling climate change and fighting international crime. Together we can provide hope for the desperate and spread the peace we now take for granted to the rest of the world. And together we can show the world a generous, outward-facing Britain we can all be proud of. So if you agree then join the Liberal Democrat campaign today, to remain in together, and to stand up for the type of Britain you think we should be.