American Idol

"O, let us be gay for the spring is now here,
With its birds and its bees and its can of bock beer,
Its warmth and its sunshine so boundless and free,
Its sarsaparilla and sassafras tea."

You'll forgive me if I don't interpret Albert Stroud's poem too literally, but after last week's unusually late snowstorm, it seems that at last spring is indeed here. It has sadly also brought with it just a hint of the punishing humidity that New Yorkers find themselves strangely craving for during the depths of winter.

I've got an additional spring in my step this morning because my mother-in-law is finally moving out of our apartment after a three-week post-baby stint. When I first read Nelson Mandela's 'Long Walk to Freedom' I couldn't necessarily relate to it, but thankfully it seems, for no longer.

Also heating up, is the competition to find the next American Idol. I am usually pretty vociferous about the garbage served upon American television (and increasingly in the UK too), but I find myself unerringly drawn to this assembly of mediocre performers. Given the current obsession that programmers have for wheeling out C and D-grade celebrities for shows like 'Dancing With The Stars'. (Heather Mills anyone?), I'm happy to express my preference for never-will-bes over never-weres. Crucially too, American Idol casts Paula Abdul in a starring role, and for a relative youngster like me, she is very much the 45-year old it's ok to fancy.

However before you debate whether I've completely lost the plot, the competition does provide one of the most dynamic and interesting betting markets imaginable. Unlike almost every other event upon which one could gamble on the outcome, the winner of American Idol is decided solely (voting fraud aside of course) by the combined opinions of millions of Americans. Most importantly on Betfair the odds are dynamic and can be traded both ways, so profits can be taken (or losses realised) on the 'Winner' market at several junctures, without ever successfully predicting the winner (nor even bothering to have any bets in place when the final eventually comes around). Moreover it is made even more intriguing because as much as Simon Cowell might wish otherwise, the contestants receive votes for reasons nothing to do with their singing ability (no comment - Ed.).

As someone interested in both economics and betting, it is perhaps the purest form of the famous Keynesian 'beauty contest' that I have come across. In his analogy, entrants in a competition were asked to choose the six most 'beautiful women' from a selection of 100 photographs. Those entrants that picked the most popular face were entered into a raffle to win a prize. As a result, Keynes argued:

“It is not a case of choosing those [faces] which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.” (General Theory of Employment Interest and Money, 1936)

Not only is his beauty contest analogy appropriate in my view for American Idol, but more interestingly each week there is a new calculation of 'average opinion' to be made because one contestant is voted off, requiring punters to wonder where 'average opinion' expects the votes for the rejected contestant to now end up.

Keynes was of course using the beauty contest example to describe the stock market, but the concept only applies in the short-run, since in the long-run a stock price will eventually equate to its intrinsic value. As the value investing guru Benjamin Graham put it:

"In the short-term, the markets are like voting machines, but over the long-term they are like weighing machines."

However unlike a stock price, the performers on American Idol have no 'intrinsic value' which they are approaching, albeit in a random fashion buffeted by the vagaries of sentiment. (Then again Keynes assured us we were all dead in the long-run anyway.) Thus take for example the incomparably awful Sanjaya Malakar. If American Idol was genuinely a singing contest, then the adrogynous Malakar would have been booted off the programme weeks ago so diabolical are his powder-puff performances.

However thanks to popular DJ Howard Stern's on-air backing for him 'in jest', there is enough momentum behind him to suggest that the 40/1 odds on his victory are generous in the extreme. I would be astonished if he won, but I am confident that 'average opinion' will begin to bullishly reassess its view on the 'average opinion' of Malakar, thus narrowing his odds accordingly.

There are now only ten contestants remaining, and if the A&R executives waiting on the sidelines had their way, they would push the detritus to one side and focus only upon the two performers who can actually sing, Lakisha Jones and Melinda Doolittle, leaving the remainder to ply their trade in the karaoke bars where they belong.

However frankly I couldn't care less who wins the show, I'm just grateful to Simon Cowell et al for creating this apotheosis of a betting medium, and express my regret that short of driving down to Altantic City, I can't get financially involved in this puritanical city, and must remain a mere unhealthily eager observer (and not just of Paula Abdul).