Nate Silver's popular book on the art and science of prediction, The Signal and the Noise has a chapter on financial markets called If you can't beat em.... The chapter spends some time discussing the statistics of market movements and the implications of the Efficient Market Hypothesis (EMH) on investment performance and its usefulness in predicting future investment performance.

Silver is not pointing out anything new when he argues that the short runs of past success investment managers use to persuade us they have skill are actually useless in predicting their future performance. It is almost a definition of the EMH that analysis of past trends and public information cannot be used to beat the market (more subtle versions admit some possibility to beat the market but not by large enough amounts to profit after transaction costs). See this related question on investment skill: Do investment managers pick stock portfolios better, on average, than monkeys throwing darts?

But, of course, some people have inside information not known to the public, though most markets prohibit profiting from such insider knowledge. In discussing the possibility of insider trading Silver makes the following assertion (p342 in my hardback edition):

One disturbing example is that members of Congress, who often gain access to inside information about a company as they are lobbied and who also have some ability to influence the fate of companies through legislation, return a profit on their investments that beats market averages by 5 to 10 percent per year, a remarkable rate that would make even Bernie Madoff blush.

So, is Silver right? Is there strong evidence that members of Congress make excess trading profits that look like exploitation of insider knowledge?

Note: the key issue is not whether some profits are made some of the time. The statistics of markets can generate large profits over several years for participants that are merely statistical runs of luck and not evidence of either skill or insider knowledge. Evidence for skill or inside knowledge requires strong statistical evidence that profits are higher than the market return over an extended period of time.

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    Is the claim that the average returns of all members of Congress, put together, solidly beat the markets? That's a much stronger (and more disturbing) claim than the title. The title's claim, that some US senators make abnormally high returns, is likely to be true just based on random fluctuations, but a similar number would be expected to make abnormally low returns too.
    – Oddthinking
    Jul 14, 2013 at 17:12
  • @Oddthinking Even assuming there's nothing foul going on it wouldn't be that strange for the wealthy elite that are connected to some of smartest people on the planet to beat the market.
    – Kit Sunde
    Jul 14, 2013 at 17:32
  • @Oddthinking Good point. I think, though, that Silver's claim is that some congressmen and senators show persistent abnormal returns over time that can't be explained by survivor bias. I guess this implies evidence of excess returns over an extended time for individuals.
    – matt_black
    Jul 14, 2013 at 17:34
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    @KitSunde Except that the statistical evidence on, for example, Wall Street fund managers, suggests they don't consistently beat the market despite being a well connected wealthy elite.
    – matt_black
    Jul 14, 2013 at 17:36
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    @KonradRudolph People mention things to skew impressions. He can make a safe, defensible claim while injecting irrelevant information to skew the reader's impression. I am failing to pick up on implicit allegations, intentionally. We should address actual claims.
    – user5582
    Jul 14, 2013 at 18:41

1 Answer 1


Pre-2004, there was "no academic literature dealing with Congressional stock returns" (Ziobrowski 2004).

The only related literature is Boller (1995), who investigated a random sample of Congressional delegates (both Senators and Members of the U.S. House of Representatives) and found that 25% of them invested in companies that could be directly affected by ongoing legislative activity. However, this result merely suggests a potential conflict of interest. (Ziobrowski 2004)

From (Ziobrowski 2004):

We document that a portfolio that mimics the purchases of U.S. Senators beats the market by 85 basis points per month, while a portfolio that mimics the sales of Senators lags the market by 12 basis points per month.

Also from (Ziobrowski 2004):

After acquisition, the cumulative abnormal return rises over 25% within one calendar year after the purchase date. The cumulative abnormal returns for the portfolio of stocks sold by the Senators are near zero for the calendar year after the date of sale. However, these same stocks saw a cumulative abnormal positive return of 25% during the year immediately preceding the event date. These results suggest that Senators knew appropriate times to both buy and sell their common stocks.

Ziobrowski applied this same methodology to members of the US House of Representatives with similar results (Ziobrowski 2011):

A portfolio that mimics the purchases of House Members beats the market by 55 basis points per month (approximately 6% annually).

(Bainbridge 2010) cited (Ziobrowski 2004), saying:

“trading with an informational advantage is common among Senators.”

(Bainbridge 2010) calls it a "reasonable inference" that some senators "were using material nonpublic information about companies in whose stock they trade", but doesn't claim that it has been proven.


Bainbridge, Stephen M., Insider Trading Inside the Beltway (June 30, 2010). UCLA School of Law, Law-Econ Research Paper No. 10-08. Available at SSRN: http://ssrn.com/abstract=1633123

Alan J. Ziobrowski, Ping Cheng, James W. Boyd and Brigitte J. Ziobrowski (2004). Abnormal Returns from the Common Stock Investments of the U.S. Senate. Journal of Financial and Quantitative Analysis, 39, pp 661-676. http://dx.doi.org/10.1017/S0022109000003161.

Ziobrowski, A., Boyd, J., Cheng, P., et al. (2011). Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives. Business and Politics, 13(1), pp. -. Retrieved 14 Jul. 2013, from doi:10.2202/1469-3569.1308

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    Damn, you beat me in quoting the Ziobrowski paper. You would have an even better answer if you also quoted the more recent one from 2011.
    – matt_black
    Jul 14, 2013 at 19:09
  • Oooh! I didn't see it. I can make it community wiki if you want to just build onto this answer.
    – user5582
    Jul 14, 2013 at 19:10
  • If you think that would be OK, go ahead.
    – matt_black
    Jul 14, 2013 at 19:44

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