It is almost three years now since I approached the editor of the prestigious academic journal, Economica, with an idea for publishing a special issue on the theme of gambling and prediction markets. The result was a conference I co-organized at the University of Riverside, Palm Desert, California, which played host to most of the leading academics in the field. The title of the conference was The Growth of Gambling and Prediction Markets: Economic and Financial Implications. I was given the additional task of co-editing the special issue.

One of the papers arising out of that conference was penned by Professors Robin Hanson and Ryan Oprea, of George Mason University and the University of California, Santa Cruz respectively. Under the title, ‘A Manipulator Can Aid Prediction Market Accuracy’, a perspective on its basic message is offered by Alex Tabarrok at Marginal Revolution. Tabarrok was considering the impact of the clear attempt by at least one determined trader to manipulate one of the US election betting markets in favour of Senator John McCain.

How much of a danger, Tabarrock asks, does this sort of activity pose for the whole concept of prediction markets? Not much, he argues, instead offering support for Hanson and Oprea’s finding that manipulation can actually improve prediction markets, for the simple reason that manipulation offers informed investors a free lunch. “In a stock market”, he writes, “… when you buy (thinking the price will rise) someone else is selling (presumably thinking the price will fall) so if you do not have inside information you should not expect an above normal profit from your trade. But a manipulator sells and buys based on reasons other than expectations and so offers other investors a greater than normal return. The more manipulation, therefore, the greater the expected profit from betting according to rational expectations.”

For this reason, it can be argued that while manipulation is possible, investors should soon move to take advantage of any price discrepancies thus created within and between markets, as well as to take advantage of any perceived mispricing relative to fundamentals. To this extent the expected value of the outcome of these transactions is a financial loss for the manipulator and a profit for the investors who act to exploit the mispricing. More importantly, the incentive the activity of the manipulator gives for others to become informed, and to trade on the basis of this information, is valuable in itself in improving the efficiency of the market.

Tabarrok offers the additional observation that, considerations of predictive accuracy aside, there is one even more important lesson to be learned from the activities of the manipulators: “…that prediction markets have truly arrived when people think they are worth manipulating”.

Some dodgy patterns are a bit less easy to spot, however, one of the best known being the so-called ‘Superbowl effect.’ This effect, identified and published by Professors Krueger and Kennedy in the ‘Journal of Finance’ in 1990, ostensibly established a solid relationship between a team from the NFC (National Football Conference) winning America’s ‘Superbowl’ and an improvement the following year in the US stock market. The pattern could be traced back to 1967. Unfortunately for Kennedy and Krueger and fellow pattern spotters, however, it soon came crashing down to earth, along with the Denver Broncos.

Now the ‘Superbowl’ effect, as it has come to be known, always did have a dodgy feel to it, if only because there didn’t seem any rhyme or reason why it should work. Other so-called ‘anomalies’ are rather more difficult to dismiss, however, one of the most well-known of these being the ‘Weather Effect’, first highlighted by Professor E.M. Saunders in a famous article published in 1993 in the ‘American Economic Review.’ In that paper, he argued that there was a link between the weather and the performance of stocks on Wall Street - the better the weather, the better the stocks performed.

The question confronting anyone interested in turning a profit was whether this was a genuine relationship or another freak finding? Well, for once those of a sceptical disposition were chastened, courtesy of a follow-up study by David Hirshleifer and Tyler Shumway, released in 2001. In that study, entitled, ‘Good Day Sunshine: Stock Returns and the Weather’, they confirmed using a different data set that there was indeed a positive link between stock returns and good weather. The reason, they argued, was a feel-good factor influencing investor sentiment. Interestingly, a Yale University working paper published the following year found that the market-makers played a big part in this, widening the spreads in the financial markets on cloudy days. In other words, the link between good weather and stock returns could, they argued, be traced in significant part to the behaviour of market-makers.

As John Lennon and Paul McCartney once put it, “I need to laugh, and when the sun is out, I’ve got something I can laugh about. I feel good in a special way: I’m in love and it’s a sunny day. Good Day Sunshine, Good Day Sunshine, Good Day Sunshine.”

Ah well, if only the duo had applied their idea to the stock market! I guess they could have beaten Professor Saunders to it. And who knows? They might even have become rich and famous.

Prime Minister Harold Wilson used to say that there were few jobs more stressful and more precarious than that of a politician but that the post of football manager was certainly one of them. Well, opinions are divided about the benefits of sacking those who run the country, and it is difficult to devise a measure which all would agree on, but there is a great deal of published analysis available which allows us to judge the effect of a change of management in other fields.

A seminal study in this regard, published by Professors Lieberson and O’Connor, found little evidence of any link between changes of Chief Executive Officer (CEO) and subsequent movements in company performance indicators such as sales and profits.

Other studies have found, in contrast, that changes of top managers do tend to be followed by sharp improvements in performance, particularly in certain sectors, such as computer equipment manufacture. Some areas of activity do seem impervious to changes at the top, however, as witnessed by a study of the effect of changes of Methodist ministers on church attendance, membership and donations. There was no discernible effect.

There is also a well-established literature which considers the impact of management change on team performance in professional sport, and this can be sub-divided into three distinct theories. According to the “common sense” theory, when a team is under-performing the manager is replaced, and if a better manager takes over, performance should improve. In the “vicious circle” theory, poor performance tends to trigger managerial change, but the disruption caused tends to make things worse. The there is the “ritual scapegoating” theory, in which the appointment of a new manager makes no difference, on average, to team performance.

Rick Audas, Stephen Dobson and John Goddard disentangled the competing theories, for the case of English football, in an article published in the Journal of Economics and Business. A detailed examination of the results of their study reveals that on average it takes up to 16 matches for a team subject to a within-season change of manager to adapt to the usual changes of tactics and playing style which ensue, and even then the team’s win rate tends to revert only to where it was prior to the change. The transition period is, on average, simply a sink into which some of the points that would have been earned are emptied.

What these results appear to tell us, then, is that the rate at which managers are replaced in English football is not optimal. The turnover is simply too fast.

So in light of these findings, is it possible to offer a rational explanation for existing attitudes to management change? Well, there may just be such an explanation, and it lies in a thing called “variance”, which is the dispersion of results about the average.

The idea here is that a change of manager may not improve performance but it does shake things up a bit. This can only be good news, of course, for a team which is likely to go down anyway. The reason is that while a change of manager may on average mean even fewer points, the change does at least improve the small chance of pulling clear of the relegation zone. Seen like this, it can be likened to an all-or-nothing throw of the dice. That’s the rational side of the argument. The problem comes when those in charge of the team’s future grow just a little too fond of the dice.

Last summer a friend of mine ran a Charity Festival at his house outside Hungerford and he managed, through contact with her parents, to persuade an up and coming female act by the name of Florence Welch to come and headline with her band. The moment Florence and the Machine walked on stage you could see that she was going to have the young crowds attention. Her shocking ginger hair and pale skin gave way to the voice of an angel as she played through her, as yet, unreleased songs. ‘Kiss with a Fist’ and ‘Dog Days are over’ were highlights, but the finale of ‘Rabbit Heart (Raise it up)’ was enough to persuade most people heading home the next morning that this girl was going to be a super star. Less than three months later she was on the front cover of the NME and now she is favourite to win the Mercury Music Prize (22% on Betfair), following in the footsteps of fellow female vocalists, Heather Small (M People), Beth Gibbons (Portishead), PJ Harvey and Miss Dynamite.

Second favourite are Hertfordshire trio Friendly Fires (18% on Betfair). The band first released their debut EP ‘Photobooth’ back in 2006 but came to the fore in 2007 when they released ‘Paris’ and ‘On Board’ and have had a cult following ever since. The boys, who first formed a band together when they were all aged 14, have finally released their self titled studio album. Singles ‘Jump in the Pool’ and ‘Skelton Boy’ have both had success as Summer anthems and they are currently working on a follow up album to be released later this year and are looking to follow up on their Best Breakthrough Award at The South Bank Show last year with the highly prestigious Mercury Music Prize.

Other bands in the running include Leicester boys Kasabian (5% on Betfair) who have for the past few years been renowned as one of the best live performers in Britain, public school garage rockers The Horrors and Scottish misery rockers Glasvegas (4% on Betfair).

As usual there is the token jazz and folk artists, Le Bib (2% on Betfair) and Lisa Hannigan (11% on Betfair), as well as the lesser known Sweet Billy Pilgrim (3% on Betfair) who put their album together on a laptop in a shed at the bottom of their garden.

September 8…
• Kasabian - West Ryder Pauper Lunatic Asylum
• The Horrors - Primary Colours
• Friendly Fires - Friendly Fires
• Glasvegas - Glasvegas
• La Roux - La Roux
• Florence And The Machine - Lungs
• Bat For Lashes - Two Suns
• Lisa Hannigan - Sea Sew
• The Invisible - The Invisible
• Led Bib - Sensible Shoes
• Sweet Billy Pilgrim - Twice Born Men
• Speech Debelle - Speech Therapy

The play was called ‘Vortigern and Rowena’, and was proclaimed as a lost work of William Shakespeare. With sceptics in the minority, chief among them being Shakespearean scholar, Edmond Malone, the play opened to a packed, enthusiastic audience on April 2, 1796. The part of Vortigern himself was played by no less a light than the fine Shakespearean actor, John Philip Kemble, brother of the legendary Sarah Siddons. He was also the manager of the Drury Lane Theatre.

The widespread excitement and anticipation among the audience soon turned, however, to bemusement and then literal disbelief, so that by the time Kemble was drawn to hint at his own opinion, repeating with emphasis Vortigern’s line “and when this solemn mockery is o’er”, the catcalls of the audience told its own story. The play ends with the entrance of the Fool, who admits that the play is not very tragic, as “none save bad do fall, which draws no tear.” In fact, there were tears, but these were tears of laughter from those members of the audience charitable enough not to boo it off the stage. The real author, William Henry Ireland, soon admitted to the hoax and promptly left for France.

So here we have a ‘lost play’ by Shakespeare examined by notables of the day, most of whom were convinced of its authenticity, or at least willing to put their name to that belief. One performance before a crowd of ordinary theatregoers, however, was enough to kill off that notion and indeed kill off the play. Indeed, it was not to see the stage again for over 200 years, when it experienced a so-called ‘comedic revival’ on November 19, 2008, by the Pembroke Players at the Pembroke College New Cellars in Cambridge.

So what we can learn here about the ‘wisdom of crowds’? Was it perhaps the case that Shakespeare is to be played, not read, and the 18th century experts who examined it simply took it on trust that it would appear better when played than read? Could it be that they were not so expert as they were given credit for? Could it be that the real experts were the performers who had played much of the canon of the authentic William Shakespeare, and that their sceptical performances tipped the wink to the theatre-going crowd? Or could it be that the crowd simply is as wise as many give it credit for, especially when it has paid hard-earned money to get through the doors. More than 200 years on, we can’t be sure what the ‘Vortigern’ fiasco tells us. But of one thing we can be sure. One crowd was enough. ‘Vortigern and Rowena’ didn’t open for a second day.

It was Yogi Berra, the legendary baseball player and manager, who famously declared - “Oh, that place. It’s so crowded nobody goes there anymore.” He might well have been referring to a certain hostelry in Santa Fe, New Mexico, called the ‘El Farol’ Bar, and the problem derived from it, widely known as the ‘El Farol Bar Problem.’

To explain, this particular Mexican bar was known for its offering every Thursday evening of Irish music. It was also known for sometimes getting very crowded on these nights. Hence the problem first proposed by Brian W. Arthur in 1994, namely whether to commit time travelling to the bar to take in the entertainment when you don’t know how many people will be there. We also assume that there’s no way of telling the numbers attending in advance of booking (presumably paying a hefty deposit) and showing up.

By the way, if you haven’t booked in advance, you can’t enter. By design or otherwise, that’s just the way it is. As such, it’s necessary for everyone to decide whether they will go to the bar or not without waiting and seeing how many others have decided to go. Brian Arthur takes as his example that 100 people want to enjoy the entertainment and are weighing up each week whether to book and attend, but they know they will only have made the right decision if fewer than 60 of the 100 people considering the idea actually do turn up.

Now, if you are one of the 100 lovers of Irish music, should you book and commit your evening travelling to the bar? Indeed, is there any way of forecasting the turnout on a typical Thursday evening? Note that while each individual member of the crowd has to act in isolation in any given week, there is no reason for them not to act on information as to how the crowd voted in previous weeks. This give at least some insight in a world where each individual must make a strategy decision based on estimates of the likely behaviour of other members of the crowd.

So, Irish music-lover, how should you decide whether to book your place? If everyone uses the same forecasting model, and has the same preferences, it seems that either everyone will go to the bar or everyone will stay away. Either way, the strategy is doomed to failure. One solution is for each individual to adopt what is termed a ‘mixed strategy’, where they make their decision according to a probability threshold, essentially throwing the dice each time and acting on the basis of what they dictate. Let’s say they all do this in week one and the bar turns out to be busy.

The next week they adjust the probability threshold and fewer people will attend. The probability of the bar being overcrowded in week 2 is therefore diminished. Those who do attend will be reinforced in their desire to turn out in week 3. And so on. There are different ways to set the problem and different learning paths and so we’ll conclude by stating (though not proving) the result presented by the latest published research paper, i.e. that the population is eventually subdivided into those who invariably go to the bar and those who almost never do.

And how many of the 100 Irish music-lovers are in the first group? Well, best guess is almost 60. So the crowd gets wise and gets happy. Until I decide to turn up!

I don’t think there were many Englishman that can say they didn’t have a slightly queasy feeling yesterday morning when Haddin and Clarke walked out of the long room with only 200 or so left to get. The feeling was one of fear. Fear that once again it would be England in the field, toiling away unsuccessfully, when another Test Match batting record was smashed. I remember a few years ago watching Brian Lara breaking the individual batting record for the second time against England thinking that he must have planned for us to get back to the Windies before he gave batting for two days another go.

Yet it was not to be despair on this occasion. England bowled superbly from the very first over in which Anderson had Clarke scurrying around his crease desperate to get through the early onslaught, but it was Flintoff, in his last test match at Lords, who stole the show, starting in his very first over with a ball that left Haddin and forced an edge that was held by the ever reliable hands of Paul Collingwood. The relief in both the England team and all around the ground was palpable, even more so when Swann got one to dip under the bat of Clarke and turn enough to leave Prior solely with the task of picking up the dislodged bails.

A fighting innings from the much maligned Mitchell Johnson was enough to keep the champagne bottles corked for an hour longer, but when he eventually missed a straight one from Swann the celebrations could begin and the rousing reception from the Lords crowd that greeted England, led in by Freddy, was very much deserved after a great comeback after the troubles in Cardiff. This was a performance of much promise that might lead a young naive England follower to think that England are almost home, but the great majority who have seen how England are able to turn from world beaters to village cricketers over night will be more wary.

The injuries to Flintoff and Pieterson do not look promising and it is surely unlikely that they will both be available in 9 days time at Edgbaston. Harmison, Bell and Sidebottom will be on high alert after success in county games over the last week and it might be England, not Australia, that make changes, all be them enforced, for the next test. The Aussies will be hurting knowing that after all their near success in Cardiff they are now moving to Birmingham in a fragile position. Their bowlers did not perform at Lords and their batters through wickets away in English-like style, but the most worrying aspect for Ricky Ponting and the coaching staff will have been the fielding. For so long they have been revered across the world for being the team who were almost robotic in their consistency in the field, especially behind the bat, and for it to be there captain who was most at fault will be a huge worry. Ponting had a really poor game, one of his poorest. Failure with the bat on two occasions, easy catches shelled, run outs missed and once again he allowed England to get under his skin and affect his performance on the pitch, his critics on both sides of the world will once again be sharpening their swords.

England must use Lords as a stepping stone and continue to improve in this series, it is hard to believe Australia will play that badly again and I would imagine that there might be a change up in their bowling attack with Clark and Lee waiting in the wings. England will be desperate to get Flintoff and Pieterson fit, and not half fit as KP clearly was at Lords. They cannot afford to be carrying people for five days at Edgbaston, that is the sort of thing that the Aussies will feast on, and after all the hard work of the last five days, a defeat in Birmingham could be even more demoralising than the Lords win was uplifting. The country has a week to prepare itself for another five days of nail biting, but doesn’t it just show test match cricket in all its glory.

There is no doubt after this series there will be a large Andrew Flintoff shaped whole not only in the England team but in the hearts of all England cricket fans who have adored watching him take on the best players in the world head on with the three lions strapped to his chest. His obvious love of the game and the enjoyment he seems to get from it has rubbed off on anyone who has ever watched him whether it be in the ground or on a television screen and he has often brought a smile to the face of even the most hardened England fan. Who can forget that cheeky sledge to Tino Best at Lords in 2004 when he tempted him to ‘clean the windows’ of the media centre with a big six. A couple of balls later Tino in his ultimate wisdom took on the challenge and lost, leaving big Fred and the whole country in a fit of laughter.

Five years on from that moment and much has happened in the career of arguably England’s most inspirational cricketer since Ian Botham. He played the major role in bringing the Ashes home in 2005, he had a go at captaincy and has also suffered a number of critical injuries that have kept him out of crucial matches. So how will England deal with no Flintoff, a man who takes crucial wickets, can score big runs very quickly from either number 6 or 7 and is by far our best slip catcher.

In truth thought there are many who believe England to be a better and better rounded outfit without Flintoff in the side. Since the Ashes in 2005 England have played 48 test matches of which Flintoff has played 23 and only be part of a winning side on 3 occasions. In the 25 games that Flintoff has missed England have won 12 and only lost 3 which is an exceptional record by anyone’s standards. With this record in mind perhaps it will not affect the England team as much as they think, presumably England would play an extra batsmen (hopefully one can field at slip) and have four specialist bowlers, with Prior moving back to number 7. The other option would be, and this relies quite heavily on Broad turning into a decent enough batsmen to fill a number 7 spot and Swann to continue to impress at 8, to add a fourth bowler and have Prior at 6, a position he has proved he is more than capable of filling.

As for the series at hand, Flintoff will almost certainly be unable to play every test match. Like Pieterson he clearly has an injury problem and one feels that if it was any other series neither of them would be quite so keen to risk what is clearly a nasty niggle. They both have a huge part to play though and Flintoff may hold the key to England managing to take 20 wickets over five days, something that never looked likely in Cardiff, even after Flintoff had once again got the crowd on their feet by steaming in to remove the new Australian golden boy, Phil Hughes. His ability to bowl at left handers from both over and around the wicket will be critical if England are to turn good positions (like they find themselves in on the first morning at Lords) into victories.

Flintoff’s career record does not mirror the influence and inspiration he has had on the England team over the past 10 or so years. He will never be thought of in the same league as Botham, and rightly so just look at his averages (31 with the bat, 32 with the ball), but he has had the same effect on fans, teammates and opposition as Sir Ian had and he has also led England to an Ashes victory. England fans will be desperate for him to do the same again in this series, he still has a huge part to play, but the future of cricket in this country is in good hands with a good group of young players and Flintoff’s retirement will not be the end of that.

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