Daily Archives: November 24, 2006

Prediction Markets Definitions – REDUX REDUX

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No GravatarI would like to comment on the post from the Hatena Diary blog. (By the way, please note that my URL has changed, because I corrected one word in the post title. Sorry for the inconvenience.)

#1. Speculation-oriented prediction markets/exchanges: TradeSports, BetFair.

#2. Hedging-oriented prediction markets/exchanges: HedgeStreet and all the Chicago exchanges that will do binary, European call options.

#3. Forecast-oriented prediction markets/exchanges: Iowa Electronic Markets, AS CLAIMED BY THESE SCHOLARS WHOSE TASK WAS TO CONVINCE THE CFTC TO GRANT THEM A NO-ACTION LETTER. (They would have not gotten it, had they emphasized &#8220-speculation&#8221-. And, of course, &#8220-hedging&#8221- was out of question.) It&#8217-s a &#8220-claim&#8221- that might be discussed, since we&#8217-ve seen that TradeSports-InTrade is a much more powerful predictive tool for the US elections. Ditto for BetFair for U.K. elections.

#4. Decision-oriented prediction markets/exchanges: I would put here the kind of stuff that Robin Hanson is so excited about.

#5. Entertainment-oriented prediction markets/exchanges: Hollywood Stock Exchange, Washington Stock Exchange, Inkling, NewsFutures.

#6. Education-oriented prediction markets/exchanges: The Iowa Electronic Markets fits here, partially, regarding the use that professors around the country make of their markets in classrooms.

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– I disagree with Google in #4. Maybe the Google internal prediction markets would fit in #3.

– I disagree with NewsFutures in #3 &#8212-I acknowledge (at least partially) the predictive power of play-money prediction exchanges, of course.

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Should we judge markets/exchanges on INTENTIONS or on RESULTS? I don&#8217-t give a damn that TradeSports-InTrade and BetFair were created for speculation– if they have better predictive power than IEM, I&#8217-m fine with them. Ditto for the HSX. I don&#8217-t give the first fig that it was created as an entertainment tool. It&#8217-s the best forecasting tool for the movie business, period.

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For the links to the prediction exchanges, see CFM.

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Previous Blog Posts:

– Prediction Markets DEFINITIONS – not a “taxonomy”

– Professor Robin Hanson’s draft definitions is validated by professor Eric Zitzewitz.

– Prediction Markets Definitions – REDUX

– Prediction Markets Definitions – by Robin Hanson – 2006-11-21

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Addendum: Robin Hanson has posted a comment&#8230-

“Oriented” is not clear enough for my tastes. Is this about trader motives? Trader results? Price results? Exchange motives?

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My Answer: I meant &#8220-exchange motives&#8221-. [&#8230- See my comments. &#8230-] But now that I think of it, another classification taking account of the &#8220-price results&#8221- makes more sense.

Previous blog posts by Chris F. Masse:

Gartmans Rules of Trading

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My favourite Thanksgiving tradition, from trading God Dennis Gartman

1. Never, Ever, Ever, Under Any Circumstance, Add To A Losing Position&#8230- not ever, not never! Adding to losing positions is trading&#8217-s carginogen- It is trading&#8217-s driving-while intoxicated. It will lead to ruin. Count on it!

2. Trade Like A Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.

3. Mental Capital Trumps Real Capital: Capital comes in two types-mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.

4. This Is Not A Business Of Buying Low And Selling High- It is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.

5. In Bull Markets One Can Only Be Long or Neutral , and in bear markets, one can only be short or neutral. This may seem self-evident- few understand it however, and fewer still embrace it.

6. &#8220-Markets Can Remain Illogical Far Longer Than You Or I Can Remain Solvent.&#8221- These are Keynes&#8217- words and illogic does often reign, despite what the academics would have us believe.

7. Buy Markets That Show The Greatest Strength- Sell Markets That Show The Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.

8. Think Like A Fundamentalist- Trade Like A Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand, them run in tandem.

9. Trading Runs in Cycles- Some Good- Most Bad: Trade large and aggressively when trading well- trade small and ever smaller when trading poorly. In &#8220-good times,&#8221- even errors turn to profits- in &#8220-bad times,&#8221- the most well researched trade will go awry. This is the nature of trading- accept it and move on.

10. Keep Your Technical Systems Simple: Complicated systems breed confusion- simplicity breeds elegance. The great traders we&#8217-ve known have the simplest methods of trading. There is a correlation here!

11: In Trading/Investing, An Understanding Of Mass Psychology is Often More Important Than An Understanding of Economics: Simply put, &#8220-When they are cryin&#8217-, you should be buyin&#8217-! and when they are yellin&#8217-, you should be sellin&#8217-!&#8221-

12. Bear Market Corrections Are More Violent And Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are- we accept it as fact and we move on.

13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow&#8230- usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.

14. Be Patient With Winning Trades- Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year&#8230-and our profits grow accordingly.

15. Do More Of That Which Is Working and Less Of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades- Cut back, or eliminate losing ones. If there is a &#8220-secret&#8221- to trading (and of life), this is it.

16. All Rules Are Meant To Be Broken.&#8230- but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.