Collecting bits and pieces of information, and aggregating it, so we can understand what people know.
Chris F. Masse May 13th, 2008
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I would lay out this dichotomy:
- Some of our academics, consultants, and exchange executives have sold the prediction markets as the ultimate forecasting tool —which is true, but people translated that as “this is an omniscient tool for forecasting”;
- The best usage of the prediction markets is that they do average what the experts think (see Justin Wolfers’ mention of a “useful counterweight”) —but that’s a far cry from being an omniscient oracle (which is what people are expecting).
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Some people would enjoy the usage of a “useful counterweight” —but not that many.
The “useful counterweight” thing is not a hot-selling proposition.
You don’t draw crowds with that.
You draw crowds with an over-selling proposition.
You draw crowds by manufacturing hype.
As a result of the collective intelligence of more than 77,000 bettors on Intrade, the prices on the site may be a good way to predict the outcome of current events — more accurate than some polls and pundits. In 2004, the market odds on Intrade predicted the presidential vote of every state but Alaska. In 2006, the odds correctly indicated the outcome of every Senate race.
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Our Explainer On Prediction Markets
Prediction markets produce dynamic, objective probabilistic predictions on the outcomes of future events by aggregating disparate pieces of information that traders bring when they agree on prices. Prediction markets are meta forecasting tools that feed on the advanced indicators (i.e., the primary sources of information). Garbage in, garbage out… Intelligence in, intelligence out…
A prediction market is a market for a contract that yields payments based on the outcome of a partially uncertain future event, such as an election. A contract pays $100 only if candidate X wins the election, and $0 otherwise. When the market price of an X contract is $60, the prediction market believes that candidate X has a 60% chance of winning the election. The price of this event derivative can be interpreted as the objective probability of the future outcome (i.e., its most statistically accurate forecast). A 60% probability means that, in a series of events each with a 60% probability, then 6 times out of 10, the favored outcome will occur; and 4 times out of 10, the unfavored outcome will occur.
Each prediction exchange organizes its own set of real-money and/or play-money markets, using either a CDA or a MSR mechanism.
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Sphere: Related ContentWET BLANKET OR BUBBLE BUSTER? — Charles Plott (a big-shot economist) condemns all the hype surrounding the prediction markets and the wisdom of crowds.
Chris F. Masse May 13th, 2008
California Institute of Technology economist Charles Plott:
What you’re doing is collecting bits and pieces of information and aggregating it so we can watch it and understand what people know. People picked this up and called it the ‘wisdom of crowds’ and other things, but a lot of that is just hype.
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It’s a too summary judgment… but there is a good portion of truth in it.
As for James Surowiecki, he has all my respect.
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Sphere: Related ContentConference on Prediction Markets
Deep Throat May 13th, 2008
I’m in the process of researching Prediction Markets as the main theme of a national conference for the Institute for International Research, the world’s largest conference producing firm. http://www.iirusa.com
I am a producer at IIR and am interested in creating an advisory board made up of a handful of the most knowledgeable and experienced professionals in this industry. I have come across many of the names on this blog through my research and thought this would be the best place to reach to all of you. IIR produces hundreds of conferences ranging from a wide array of topics every year. i.e.: market research, pharma, technologies, financial services, etc. Prediction Market is a topic that we are hoping to tackle this year. I would greatly appreciate any insight and tips experts are willing to offer. I plan to turn this event into an annual gathering that attracts Researchers, Strategists, Project Managers, Venture Capitalists, Entrepreneurs, Researchers, Academics, Policy Makers, and Analysts. I will also be looking to recruit speakers as we move along to the next phase of production. Thank you in advance for your contributions.
Best,
Dawn Olsen
Conference Producer
Marketing & Business Strategy Division, IIR
708 Third Avenue, 4th Floor, NY, NY 10017
646-895-7329 Dolsen@iirusa.com
Prediction Markets: A new Special Interest Group on forecastingprinciples.com
Andreas Graefe May 12th, 2008
The marketsforforecasting.com Special Interest Group provides a resource for researchers and practitioners who are interested in the field of prediction markets.
In keeping with the objectives of forecastingprinciples.com, this SIG will present research findings that support evidence-based principles. In particular, the site covers research that provides guidelines, prescriptions, rules, conditions, action statements, or advice about what to do in given situations.
The current site is a beta-version. To further develop the content, we ask for your contributions!
The material for this special interest group is maintained by Andreas Graefe. Please contact him for further information, and with corrections, additions, or suggestions for these pages.
Sphere: Related ContentThe secret feed that Jed Christiansen doesn’t want you to fetch
Chris F. Masse May 12th, 2008
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His comment feed URL is:
- http://mercury-rac.disqus.com/c/975/comments.rss
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How BetFair did treat its customers on the day that the BetFair Starting Price system crashed down
Deep Throat May 12th, 2008
BetFair did pay the backers at better prices than the reconciliation threw out. The UK’s Grand National is the one race in the year where non-regular bettors bet, and BetFair couldn’t give them a poor experience. The cost was borne by BetFair, not by the layers (the short-sellers), a decision taken shortly after the race. (One senior executive took this decision within 30 minutes of the race being settled.)
Sphere: Related ContentHow BetFair markets are settled in the situation where their integrity team are unhappy about some aspect of the betting on that event
Deep Throat May 12th, 2008
If suspicious betting is detected then the winnings of the specific accounts in question are frozen until such time as BetFair have had the chance to investigate and determine one way or the other. That has no effect on BetFair’s ability to settle the market for every other customer. If one trader has placed a bet on a match in good faith, that trader’s bet wins, and there’s a subsequent investigation, there is no reason whatsoever to disadvantage that trader by withholding settlement, particularly as a full investigation could take weeks.
That applied for the Hernandez v Brezezicki match.
Sphere: Related ContentUsing enterprise prediction markets too early in the innovation process is BAD.
Chris F. Masse May 11th, 2008
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I don’t think that prediction markets need to be the incentive.
I think that when it comes to generating ideas, you need to be as open and inclusive as possible. The process should allow anyone that submits or helps develop an idea to share in any rewards from that idea. Once it’s developed, then it can move to a stage where you can do forecasting via a prediction market.
Using a prediction market too early can do two things:
1- Poor forecasting due to social influence.
2- Limit revolutionary new ideas. It’s too easy to short an idea that looks strange, when in fact it looks odd because it’s revolutionary. The idea process should foster and develop ideas, not make them compete against each other.
I’m glad to have sparked a little discussion here.
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Previously: Innovation Mechanism = Voting Mechanism + Prediction Market Mechanism
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