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Miscalibrated Priors, Unstable Anchors, Improper Posteriors and Inadequate Models.


The world is a complex place - it is in our best interest to reduce complexity. The brain infers, associates, forms patterns amidst the noise, leads us to systemise and leads us astray.

The uncertainty reduction business is big business - Daniel Kahneman; Philip Tetlock; Tim Harford, and Nate Silver make a living on the back of it. So to does every snake oil salesman, husckster and sleight of hand merchant playing on the betting exchanges. People will pay good money to feel less uncertain about the present, about the past, about the future.

Betting markets are a hive of uncertainty. Betting market prices are subject to random perturbations prior to the commencement of the event; a concurrence of all sorts of factors, not least, the fact that nobody is ever trading under the same informational (and/or psychological)conditions. There is massive varience in terms of how people choose to interpret and integrate so-called new objective information - depending on their own past experiences, their memories, their mood, their awareness of their own emotions; the extent to which they are compelled to systemise and the degree and extent to which they are constrained by time and money concerns. There is also significant varience - which occurs when intersubjectively shared beliefs are suddenly upended, and the betting market is forced to adjust towards a new equilibrium. Think the reaction of political betting markets to Trump winning Florida in the 2020 Presidential Election (below).


The New York Times ascribes a 86% implied probability to Hillary Clinton.

The New York Times ascribes a 86% implied probability to Hillary Clinton.

Noise extraction problems arise as a result of the fact that there is always a veritable melange of different biases operating at the same time, leading to different belief-movement patterns across different time periods of the day - until the event closes. A trader who succumbs to a conservatism bias cling too strongly to his prior beliefs, and ignores new patterns, whereas a trader who embraces the representativeness heuristic finds patterns in data too readily (oh look it is another Robert Havlin drifter). Whilst people enter the betting market hoping to form evaluations which are the best that can be attained in the light of the available information, in reality most have trouble avoiding hasty judgments, superficial intuitions and careless conclusions. Moreover, at some point or other everybody succumbs to the cognitive bias of illusory superiority and is guilty of overestimating just how rational, savvy and strategically focused they really are. In nuce, biases in reasoning processes lead to the acceptance of erroneous conclusions - and people think that they are being smart when in fact they have just hit it lucky.

The majority of traders are biased as regards the evidential bar that they set themselves and accordingly in the choices that they make at the end of the evidence accumulation process. People have faith in their own bullshit - they are too sure that they are right - when in fact, more often than not, they are guilty of attaching significance to things that simply have no significance (inappropriate salience is assigned to (benign) external stimuli that then crystalise and drive goal directed action). Sometimes they get lucky, but generally speaking they simply inhabit a world of Miscalibrated Priors, Unstable Anchors, Improper Posteriors and Inadequate Models. And they attain for themselves a life membership to the Dunning-Kruger Club.

Show me a man who claims he is objective and I'll show you a man with illusions. Henry R. Luce



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To cite this article: Niall O'Connor Miscalibrated Priors, Unstable Anchors, Improper Posteriors and Inadequate Models. (Published on Bettingmarket.com 30/11/2020 . Cognitive Flexibity = Greater Plasticity. All Rights Reserved.)



Copyright bettingmarket 2020. First Published; 30/11/2020 All Rights Reserved.