Marginal Revolution

From Prediction Markets to Decision Markets and Beyond!

Alex Tabarrok — Tue, 07 Jul 2026 11:18:21 +0000

Arin Dube points to a great illustration of the power of prediction markets. Yesterday due to a new scandal the probability that Graham Platner would drop out of the Maine Democratic primary exploded from 9% to 96% (+87 percentage points). At the same time, the probability that the Democrats would win the election jumped by about 9 percentage points, from 54% to 63%. What does this tell you?
The market is signaling that Platner reduces the Democrats’ chances of victory. We can be more precise. If an 87-point increase in the probability of dropping out gets you 9 points of winning, then a 100% chance of dropping out implies a gain of 9/0.87 ≈ 10.3 percentage points.

Thus the market’s best estimate is that Platner is reducing the Democrats’ chance of winning by about 10 percentage points (compared to an unknown replacement). That’s a pretty big number! Democrats should surely use this information to make better decisions.

Now, I have been a bit loose. We have implicitly assumed that the news mainly moved the probability of Platner dropping out, rather than independently changing the Democrats’ general-election prospects. The issue is we are trying to reverse engineer two conditional prices, P(win|drop) and P(win|stay), from one unconditional price, P(win), and its comovement with P(drop). It works pretty well here as an illustration but Robin Hanson’s idea is that we can do better yet by trading the conditionals instead of inferring them.

Hanson’s decision markets would run contracts of the form “pays $1 if Democrats win, conditional on Platner dropping out — bet refunded if he stays.” Plus the mirror contract conditioned on staying. The refund provision makes the price a conditional probability: a trader pricing the first contract doesn’t need any view on whether Platner drops out, only on how the race goes if he does. With this structure we would get cleaner estimates of the conditional probabilities–in this case whether the Democrats do better with Platner in or out–which is exactly what a decision maker needs.

We were able to plausibly reverse engineer our estimate because the market happened to move 87 points in a single day. But a decision market would have posted the number continuously, no scandal required. In other words, with decision markets in play, not just prediction markets, we could have seen how much Platner was costing the Democrats before the latest scandal hit—which is precisely when the information would have been most useful.

It’s been fun to see prediction markets catch on with the public but the world is still decades behind Hanson’s decision markets—let alone futarchy!

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What should I ask Liaquat Ahamed?

Tyler Cowen — Tue, 07 Jul 2026 09:58:11 +0000

Yes I will be doing a Conversation with him. From Wikipedia:

Ahamed is the author of Lords of Finance: The Bankers Who Broke the World (2009). The book was awarded the 2010 Pulitzer Prize for History, the 2010 Spear’s Book Award (Financial History Book of the Year), the 2010 Arthur Ross Book Award Gold Medal, the 2009 Financial Times and Goldman Sachs Business Book of the Year Award. For 2009 it was recognized as one of Time magazine’s “Best Books of the Year”, New York Times “Best Books of the Year” and Amazon.com’s “Best Books of the Year”. It was shortlisted for the Samuel Johnson Prize…The book narrates the events preceding the Black Tuesday stock market crash of 1929 and the disastrous response of the world’s major central banks.

He has a new and excellent book out, namely 1873: The Rothschilds, the First Great Depression, and the Making of the Modern World.

Liaquat Ahamed also has extensive experience in the private sector, and dealing with the World Bank and IMF. He has produced a movie and done much more as well.

So what should I ask him?

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Wiesbaden notes

Tyler Cowen — Tue, 07 Jul 2026 04:41:11 +0000

Who goes to Wiesbaden these days? The era of Russian nobles taking the cure here and gambling is long since gone. And yet here we are. The proximate cause of this trip is the desire to see Grigory Sokolov, one of the world’s great pianists and a cult figure of sorts. He rarely tours North America, maybe these days never as he is 76. The current program includes Beethoven’s fourth piano sonata, Beethoven’s Op.126 Bagetelles, and Schubert’s last piano sonata. How can one say no? Sokolov also was a favorite of Tom Schelling, I might add, especially his recording of The Art of the Fugue, in my view one of the best classical music recordings of all time.

Besides, I have long been a believer in semi-random excursions to mid-size, slightly neglected German cities. There remains a strong cultural federalism in Germany, and so you might see and hear wonderful things in many different parts of the country.

I perceived two difficult Wiesbadens. In one, if you walk through the cheaper part of the pedestrian zone in the evening, the city seems mostly Muslim. But if you walk around during the morning, the city seems mostly German. I might add that some of the younger Muslim women show signs of assimilating, at least based on how they dress and present themselves. The older women tend to stick with the headscarves.

Over the last twenty years, inflation-adjusted real estate prices in Wiesbaden have gone up about forty percent, an OK performance. At times the city “does not feel like Germany any more,” but I think it is holding on. The proportion of new building is roughly equal to the population growth, so I do not think this price effect is a NIMBY effect. Rather it reflects the fact that Wiesbaden is still a pretty nice place to live. that said, in some significant ways Germany in the traditional sense is failing to reproduce itself.

It was stunning to me to discover how hard it is, in most of the downtown, to find plain, ordinary German food. At any price level. There is no current equivalent of Wienerwald or Nordsee to be seen, never mind a decent Wiener Schnitzel.

Much of Wiesbaden was destroyed and rebuilt, but the best fifteen or twenty buildings show the previous wealth and splendor to good effect. You will see these gems walking around, though only periodically. There is also an old Roman wall and a moving, more recent Holocaust memorial.

Most German ice cream just isn’t that good, so try L’Art Sucre for something French.

Museum Reinhard Ernst is the new institution in town, and it specializes in color field abstract art. The building is impressive, but the collection is weak except for a few Stellas. Why organize a museum around that basis unless the underlying collection is super strong in that area? This one is not. I can forgive the absence of the expensive American Ellsworth Kelly, but no Blinky Palermo or Günther Förg?

Nonetheless their restrooms might forestall this kind of Larry David conflict:

(At Museum Ludwig in Köln, by the way, you get the discount for being disabled only if you have “fifty degrees of disability,” however they might measure that. Slight disabilities are not enough, you must be truly “schwerbehinderte,” as judged by the state, heaven forbid the museum rely on the honor system.)

Museum Wiesbaden in contrast was an unexpected delight. Although it is mainly a natural history museum, they have one of the world’s best collections of Art Nouveau and the single best Jawlensky collection, and you can have these all to yourself. Very few people seem to go there.

As for the economy, here are some Germany facts of the day. Yet Germany continues, and visits remain a source of pleasure and interest.

Sokolov, by the way, played six encores. Where should the Germany trip target next year?

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Ilya Somin defends the American Revolution

Tyler Cowen — Mon, 06 Jul 2026 18:32:47 +0000

1. Far from retarding the abolition of slavery, the Revolution actually accelerated it. Its triumph gave a big boost to Enlightenment liberalism, which inspired the First Emancipation in the US (the abolition of slavery in the North that became the first large-scale emancipation of slaves in modern history), and boosted antislavery movements in Europe, as well.

2. Had the Revolution been defeated, Enlightenment liberal ideology would have been dealt a setback in Britain and France, too. That would have set back antislavery movements there, as well. It is no accident that many antislavery leaders in Europe were also sympathizers with the American Revolution. The Marquis de Lafayette was just one of the most famous examples of European liberals who actively backed both.

3. The West Indian slaveowner lobby in Parliament was strong enough to block abolition of slavery until 1833. Had Britain also been saddled with the much larger proslavery lobby of the American South, it would have taken far longer. Especially when you combine the impact of the larger slavery lobby with the force of point 2 above.

Here is the full piece, with additional arguuments.

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Monday assorted links

Tyler Cowen — Mon, 06 Jul 2026 15:49:36 +0000

1. Advice for aspiring policy analysts.

2. Ten underrated history books.

3. AI superforecasters.

4. Fable makes a movie out of Last and First Men.

5. A lot of them should have been fired anyway.

6. The world’s first fully robot-run hotel in China?

7. Will the UK run out of air conditioning units?

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Capital Gains Can Be Labor Income

Alex Tabarrok — Mon, 06 Jul 2026 11:20:36 +0000

Zwick and Zidar argue that a substantial share of the decline in labor share can be accounted for by changing forms of pay, including pass-throughs and equtiy compensation. In particular, if an employee is paid in stock and that stock increases in value then the tax rules tend to count some of that as capital income (depending on when the capital gains occur) rather than as labor income. Zwick and Zidar point us to Human Capitalists for the details:

Human capitalists are corporate employees who receive significant equity-based compensation such as equity grants and stock options. These employees are partial owners of US firms, and in return for their human capital input, human capitalists accrue a share of firm profits through firm dividends and capital gains in addition to earning wages. We document the stylized facts describing the evolution of human capitalists’ income over time and across industries within the US manufacturing sector.¹ Human capitalists have become an increasingly important class of corporate income earners. Due to measurement challenges, prior work has underestimated the importance of equity pay below the C-suite. Correctly measuring the total income of human capitalists substantially alters conclusions about changes in factor shares and technological complementarity.

Equity-based compensation represents 36% of compensation to human capitalists from 2010 to 2019 and constitutes a 7% share of value added in the manufacturing sector in 2019. Correctly accounting for the total income earned by high-skilled workers has a substantial effect on measured changes in labor shares over the modern era. The addition of equity pay to cash wages reduces the decline implied by the wage-only income share of value added in manufacturing since the 1980s by 32%. Without including equity pay, high-skilled labor’s share decreased from 17% in the 1980s to 11% in the most recent decade. The inclusion of equity-based compensation almost eliminates this decline. The high-skilled share of total labor income increases from one-third at the beginning of the 1960s to two-thirds in the 2010s when equity-based compensation is included.

See also my previous post The Labor Share Fell. So What?

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The Troubled History of Government Equity in Technology

Tyler Cowen — Mon, 06 Jul 2026 08:28:45 +0000

Even though Germany privatized Deutsche Telekom in 1996, the federal government retained a substantial ownership stake. This partial state ownership status, which remains to this day, presents a textbook example of how this type of arrangement distorts incentives and delays the competitive dynamism necessary for technological progress.

Through the late 1990s and into the 2000s, Deutsche Telekom was buttressed by its privileged position and implicit government backing and leveraged this support to resist infrastructure competition. Rather than aggressively deploying broadband in order to compete with rivals, the company lobbied for regulatory arrangements that protected its legacy copper network. As a result, Germany—one of the world’s largest economies and a hub of engineering excellence—consistently trailed other European competitors in broadband deployment. To see German broadband stagnate while the competitive markets in Scandinavia and other European countries surged ahead was particularly jarring, as Germany had directly linked its economy to workplace digitization.

Germany’s broadband woes did not result from a lack of capital or engineering talent at Deutsche Telekom. Instead, government ownership produced a fundamental alteration of the company’s incentive structure. With state backing, Deutsche Telekom had fewer reasons to take risks, cannibalize its own infrastructure, or accept short-term losses in favor of long-term technological leadership and more reasons to cultivate political relationships that protected their existing revenue streams. This dynamic is reliably produced by partial government ownership of private companies.

Here is much more from Mark Dalton at R Street.

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The history of heat deaths in Europe (from my email)

Tyler Cowen — Mon, 06 Jul 2026 05:12:29 +0000

I will not double indent, all of what follows is from economic historian Daniel Gallardo Albarrán of the Netherlands:

“…you posted a link to an article on how Europe became the world champion of heat deaths.

Something that the article did not cover, which I find particularly outrageous is that Europe used to be at the forefront of reducing deaths due to extreme temperatures in the early 20th century, but then AC came in and the US took the lead. To flesh this out a bit, let’s consider some recent research on this field, including my own, that is comparable to the article by Barreca et al. referenced in the post, the following points are important:

Summers became increasingly deadly during the 19th century as a result of urbanization and overcrowding. They were incredibly deadly, mostly, for infants who died in disproportionate amounts due to gastrointestinal diseases. Children and adults died as well from heatstrokes and the like, but their relative importance in the death statistics was rather small
The turning point in Europe happened in the 1900s and 1910s.
- For instance, in Germany summers began being less deadly after ca. 1905, as a result of investments in water provision, healthcare and infant care. (See my own paper on this in the EHES Working Paper Series, no. 290)
- In England the turning point is somewhere around WWI (see Hanlon et al., 2021, JEH), possibly due to improvements in the disease environment.
In the United States, before the arrival of AC, summer diarrheal disease that largely affected infants would only go down much later during the 1920s and 1930s (see Anderson et al., 2022, EEH). A few decades after European cities had progressed substantially in this regard…
This reversal does not get much attention in accounts of current differences in the deadliness of extreme temperatures. This is unfortunate because from an early-20th century perspective, it was far from obvious at the time that this would happen. But the lack of willingness to adopt the arrival of a very useful technology (AC) was something that we (Europeans) have brought onto ourselves over many decades, and this is largely independent from recent phenomena such as rising global temperatures, inequality trends, etc. This is simply inefficient governance and lack of attention to a problem that takes the lives of many.”

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What Makes a Great Composer?: A Data-Driven Exploration of Music History

Tyler Cowen — Sun, 05 Jul 2026 18:02:06 +0000

A very good book, forthcoming, by Karol J. Borowiecki and Marc Lawx, here is the Amazon link, here is the Princeton University Press page.

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Sunday assorted links

Tyler Cowen — Sun, 05 Jul 2026 16:09:47 +0000

1. The family keeping watch over a 52-year-old pot of soup (WSJ). I guessed the country wrong.

2. The rise of grocery tourism.

3. PEPFAR interview. Much of this is substantive, and interesting. But some of Mike’s claims are absurd, for instance: “Elon Musk, on his own, if he paid his taxes, could end world hunger.” Can he really believe that?

4. David Brooks on who benefits from AI (Atlantic).

5. Michael Polanyi’s book The Contempt of Freedom is now reissued. Amazon link here.

6. Falling fertility on the political left is the key driver of U.S. birth rate decline. Do note that political views are somewhat heritable. That said, other demographics are moving America to the left economically.

7. Spanish demographics and net tax contributors.

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What should I ask Michael Moritz?

Tyler Cowen — Sun, 05 Jul 2026 07:04:40 +0000

Yes I will be doing a Conversation with him, based around his new book Ausländer: One Family’s Story of Escape and Exile. Mike of course was a pioneering venture capitalist through Sequoia, and before that had a distinguished career as a journalist, which included books on Chrysler, Apple (the first such book I believe?), and soccer coach Alex Ferguson of Manchester United. Here is his Wikipedia page.

So what should I ask him?

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Tyler, Nabeel, and Jackson on French thinkers

Tyler Cowen — Sun, 05 Jul 2026 04:46:49 +0000

Nabeel: (57:47) …For example, there’s a French thinker called Jacques Derrida. I probably should go and read him at some point, but I’m not entirely convinced there is a there there, and I don’t know anyone who swears by it. If Tyler told me, “Nabeel, you are missing a big piece of your life by not reading him,” I would go read him tomorrow. But I don’t have any of those people.

Tyler: (58:44) Lacan is my marginal case of “no there there.” So Derrida, I put in a fair amount of effort and did conclude, rightly or wrongly, that there’s no there there. So you can, in my opinion, write him off. Lacan, I keep on wondering. Smart people still will say, “This is amazing.” I’ve tried a bunch of times, but I haven’t given up. There’s a new Lacan book coming out later this summer and I’ll try it again. We’ll see. That’s my marginal “is there a there there” figure.

Nabeel: (59:13) Yeah. I think modern French thinkers put too much of a premium on sounding cool, or postmodern philosophy generally. I think it repays some effort to kind of grasp the core ideas, but it doesn’t repay making it your life’s reading or something.

Tyler: (59:26) Baudrillard is quite good and Foucault is extremely interesting. So I’m not against “the French” in this period, but if they keep on not making sense, I feel I’m educated well enough.

Jackson: (59:37) You have a lot of context.

Tyler: (59:38) That at some point I can strike the ledger.

Nabeel: (59:41) I do—Nowadays, I just put Foucault through GPT and I just have GPT explain it to me, and that’s going to be good enough for now.

Tyler: (59:50) The problem with Foucault, I think, is so much of the history is wrong in a quite mundane way, so there’s something very problematic about it. But the stuff—I think it’s in a way quite simple, almost too simple. And the fact that the current right has so latched on to Foucault is a sign that it’s simple. I don’t mean necessarily bad, but there are these structures and they’re trying to tell you what to do. And there’s something anonymous about that as well. It’s not just the individuals who form the conspiracy. It’s how a lot of the world thinks today.

Here is the longer discussion, already linked to.

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Why we love this country

Tyler Cowen — Sat, 04 Jul 2026 18:37:14 +0000

A Free Press feature for the 250th, here is my entry:

Tyler Cowen can’t decide, so he picks about 20 things instead.

My favorite thing about America is that I do not have a single favorite thing. We have the NBA (with a Toronto team too), the world’s best AI models, Alexander Calder sculptures, a few wonderful R.E.M. albums, southern Utah, the world’s best Constitution, lots of air-conditioning, sausage in southwest Louisiana, the infield fly rule in baseball, Winslow Homer, Sioux Plains drawings and Navajo blankets, the music of Chuck Berry and Brian Wilson, cheeseburgers, deep capital markets, the world’s best universities, the Museum of Modern Art, Chattanooga, Tennessee, lots of big airports, the north rim of the Grand Canyon, red cardinals and blue jays, about two dozen cities and towns named Paris, self-driving vehicles, not just one but two Dakotas, three branches of government (I hope not four), and the best set of immigrants in the world. And that is just scratching the surface.

The other contributors are notable as expected.

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