The Balance Sheet

The econoblogosphere now has three guys who can actually write well!

James Surowiecki has joined Paul Krugman and Felix and started a blog over at the New Yorker. I'm a huge fan of Surowiecki's book The Wisdom of Crowds and hope that at some point he shares his thoughts on the question of market manipulation in prediction markets.

Surowiecki also has some thoughts on my post yesterday about heigthened market volatility in the 3 to 4 PM hour:

A couple of thoughts on the post: First, the graphs in Jelveh's post may already be out-of-date, in the sense that much of what they actually show is not a market that's volatile in the way we normally use the word--that is, a market in which investors are swinging wildly between being bullish and bearish--but rather a market in which already-bearish traders were simply becoming more and more bearish as the day went along. As Jelveh says, most of the big final-hour market moves since mid-September have been massive sell-offs, and I believe most of them have happened on days when the market was already down. Since last Friday, by contrast, we've seen a truly volatile market, with investors crazily oscillating between greed and fear on practically a minute-by-minute basis. (This is also what we saw in the market in the two months leading up to Lehman's failure, but these days the swings are amplified.) I wouldn't be surprised if we continue to see massive last-hour moves in this market, but their nature may be different from what we saw between September 15th and October 10th.

The second point is an obvious one: in a market, this kind of phenomenon feeds on itself, particularly in the short-run. If traders believe that they're going to get huge moves in the last hour of trading, then they're likely to act in ways that create huge moves. Certainly if you were watching the market yesterday, your heart had to be beating a lot faster around 3 P.M. What was interesting about yesterday, though, was that while it seemed a foregone conclusion that we'd get a huge point move in the last hour, it was totally unclear in what direction that move would be. And that's very different from a week and a half ago.