[testaccount28]

but like, here in the real world, farmers use weather derivatives. so the technology works, has a use case, is proven.

if your point is that one should not treat the market's number as some oracular probability, then... of course i agree! there is no such thing. the market provides a signal, like any other.

[skybrian]

Not a farmer, but I believe they use weather derivatives to hedge and weather forecasts for predictions? Going through markets for weather forecasts is adding a level of indirection that generates a noisier signal.

The idea when hedging isn't to win on expected value. It's to reduce risk. You're paying the market to provide insurance.

As a side effect, insurance does sometimes generate interesting data. The insurance industry generates good data about life expectancy. But it doesn't tell you when you're going to die.

[DennisP]

Good points, but commodity futures and stock prices take into account all sorts of information. They go haywire sometimes but given how hard it is to beat the market, they seem to do a pretty good job of aggregating it all.

[skybrian]

As we learn from reading Matt Levine, they might also be taking into account signals that are irrelevant to you for technical reasons, or just nonsense. Often it works well but sometimes you get meme stocks.

[DennisP]

Which is why I said "they go haywire sometimes." But in most cases, they work well enough that very few professional investors are able to consistently beat the judgement of the market.

[testaccount28]

just to be clear about what you're saying, you would predict that the implied probabilities from weather derivative prices are often very different than what is forecasted, and, when those differences occur, it is the forecast that is more likely to be right?

...would you like to make a bet to this effect?