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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Donald Trump vs Barack Obama: How the inauguration speeches compared

We compared the two presidents on trade, foreign affairs and climate change – so you (really, really) don't have to.

After watching Donald Trump's inaugural address, what better way to get rid of the last few dregs of hope than by comparing what he said with Barack Obama's address from 2009? 

Both thanked the previous President, with Trump calling the Obamas "magnificent", and pledged to reform Washington, but the comparison ended there. 

Here is what each of them said: 

On American jobs

Obama:

The state of our economy calls for action, bold and swift.  And we will act, not only to create new jobs, but to lay a new foundation for growth.  We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together.  We'll restore science to its rightful place, and wield technology's wonders to raise health care's quality and lower its cost.  We will harness the sun and the winds and the soil to fuel our cars and run our factories.  And we will transform our schools and colleges and universities to meet the demands of a new age.

Trump:

For many decades we've enriched foreign industry at the expense of American industry, subsidized the armies of other countries while allowing for the very sad depletion of our military.

One by one, the factories shuttered and left our shores with not even a thought about the millions and millions of American workers that were left behind.

Obama had a plan for growth. Trump just blames the rest of the world...

On global warming

Obama:

With old friends and former foes, we'll work tirelessly to lessen the nuclear threat, and roll back the specter of a warming planet.

Trump:

On the Middle East:

Obama:

To the Muslim world, we seek a new way forward, based on mutual interest and mutual respect. To those leaders around the globe who seek to sow conflict, or blame their society's ills on the West, know that your people will judge you on what you can build, not what you destroy. 

Trump:

We will re-enforce old alliances and form new ones and unite the civilized world against radical Islamic terrorism, which we will eradicate completely from the face of the earth.

On “greatness”

Obama:

In reaffirming the greatness of our nation we understand that greatness is never a given. It must be earned.

Trump:

America will start winning again, winning like never before.

 

On trade

Obama:

This is the journey we continue today.  We remain the most prosperous, powerful nation on Earth.  Our workers are no less productive than when this crisis began.  Our minds are no less inventive, our goods and services no less needed than they were last week, or last month, or last year.  Our capacity remains undiminished.  

Trump:

We must protect our borders from the ravages of other countries making our product, stealing our companies and destroying our jobs.

Protection will lead to great prosperity and strength. I will fight for you with every breath in my body, and I will never ever let you down.

Stephanie Boland is digital assistant at the New Statesman. She tweets at @stephanieboland