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.

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Richmond is a wake-up call for Labour's Brexit strategy

No one made Labour stand in Richmond Park. 

Oh, Labour Party. There was a way through.

No one made you stand in Richmond Park. You could have "struck a blow against the government", you could have shared the Lib Dem success. Instead, you lost both your dignity and your deposit. And to cap it all (Christian Wolmar, take a bow) you self-nominated for a Nobel Prize for Mansplaining.

It’s like the party strategist is locked in the bowels of HQ, endlessly looping in reverse Olivia Newton John’s "Making a Good Thing Better".

And no one can think that today marks the end of the party’s problems on Brexit.

But the thing is: there’s no need to Labour on. You can fix it.

Set the government some tests. Table some amendments: “The government shall negotiate having regard to…”

  • What would be good for our economy (boost investment, trade and jobs).
  • What would enhance fairness (help individuals and communities who have missed out over the last decades).
  • What would deliver sovereignty (magnify our democratic control over our destiny).
  • What would improve finances (what Brexit makes us better off, individually and collectively). 

And say that, if the government does not meet those tests, the Labour party will not support the Article 50 deal. You’ll take some pain today – but no matter, the general election is not for years. And if the tests are well crafted they will be easy to defend.

Then wait for the negotiations to conclude. If in 2019, Boris Johnson returns bearing cake for all, if the tests are achieved, Labour will, and rightly, support the government’s Brexit deal. There will be no second referendum. And MPs in Leave voting constituencies will bear no Brexit penalty at the polls.

But if he returns with thin gruel? If the economy has tanked, if inflation is rising and living standards have slumped, and the deficit has ballooned – what then? The only winners will be door manufacturers. Across the country they will be hard at work replacing those kicked down at constituency offices by voters demanding a fix. Labour will be joined in rejecting the deal from all across the floor: Labour will have shown the way.

Because the party reads the electorate today as wanting Brexit, it concludes it must deliver it. But, even for those who think a politician’s job is to channel the electorate, this thinking discloses an error in logic. The task is not to read the political dynamic of today. It is to position itself for the dynamic when it matters - at the next general election

And by setting some economic tests for a good Brexit, Labour can buy an option on that for free.

An earlier version of this argument appeared on Jolyon Maugham's blog Waiting For Tax.

Jolyon Maugham is a barrister who advised Ed Miliband on tax policy. He blogs at Waiting for Tax, and writes for the NS on tax and legal issues.