The tough questions are not asked.
Brent Stinskis Media Predict made it into The Economist.
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Monthly Archives: May 2007
Manipulation can affect prices
For the last two weeks a very interesting manipulation has been going on in Intrade’s “Hillary Clinton for President” contract.
1. The contract had been trading between 23 and 26 all year. It has consistently been about half the price of the “Hillary to get nominated” contract price. This ratio implies that, conditional on nominating Hillary, the Democrats have a 50 percent chance of winning the Presidency.
2. Comparing this with the unconditional probability of a Democratic victory (about 56 percent throughout 2007) suggests that Hillary is a slightly weaker general election candidate than the alternatives (Obama, mainly). [Note I say “suggests” because the comparison of conditional probabilities implies a correlation, but not necessarily that a Clinton nomination would cause a better outcome for the GOP. For more see the fifth question in this paper].
3. Around May 12, someone started buying “Hillary for President” pretty heavily, driving the price up to 40. This price is clearly ridiculous for two reasons:
3a. You could sell the President contracts of Hillary, Obama, Gore, and Edwards for a combined 69 (40+17+8+4) and buy the “Democrat to win” contract for 56.
3b. Since there was no movement in the nomination contract, the conditional probability of Hillary was now a ridiculous 40/52 = 77%, while the conditional probability of “Not Hillary” was 16/48 = 33%.
4. Unlike past manipulation attempts, this manipulator isn’t just dumping a ton of money in to move the price once. He (or she) is moving the price, and then providing support to keep the price high. Note that the price stayed at 40 for about a week (on higher than normal volume).
5. I mentioned the manipulation at the end of my talk at the Palm Desert prediction markets conference, figuring that there was no surer way to get a $100 bill picked up than to tell that crowd about it. Someone emailed Greg Mankiw and he blogged about it the next day. (Justin and I also just tipped off Tyler Cowen). Since then there has been some downward price pressure, but the manipulator isn’t throwing in the towel. He/she keeps replenishing the bid side of the order book, albeit giving ground in the process.
6. By my calculation, the manipulator has spent about $10k to push the Hillary contract up around 12 pts on average for 2 weeks, buying about 8,500 contracts in the process. [I’m assuming 26 is fair value and just summing up volume*(price – 26)].
7. So what do we learn from this?
7a. Manipulation doesn’t have to be as ham fisted as the 2004 Bush reelection contract manipulation.
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7b. The manipulators are getting smarter. This manipulator was smarter in one sense by providing price support after the fact. But of course, he/she shouldn’t have pushed the price up to such an obviously ridiculous level (and should have bought and sold other contracts to keep the pricing relationships consistent). The same mistake probably won’t be made next time.
7c. By prediction markets standards, manipulation is expensive. But by political spending standards, manipulation could be reasonably cheap. That said, I can find only one media mention of the inflated Hillary price. $10k for one blog mention probably isn’t great value for money, but the Intrade prices get cited a lot these days, so the manipulator may just have been unlucky.
7d. None of this disputes Hanson and Oprea’s point that, if anticipated, manipulation could increase average prediction market accuracy. In their model, traders all have rational expectations about how much manipulation to expect. In the real world, they may need some help (hence this post).
7e. Although the Hillary price is down to 34.5 (bid-ask midpoint at time of writing), there are about 500 contracts bid above 33, so there is still plenty of free money there if you want it.
Ireland – Prediction Markets on the 2007 Irish General Election
BetFair
Niall O’-Connor’-s comment:
All seats in the 30th Dail have now been filled, with the allocation of seats as follows: Fianna Fail 78, Fine Gael 51, Labour 20, Progressive Democrats 2, Green Party 6, Sinn Fein 4, Others 5. Fianna Fail are five short of an overall majority in the Dail parliament, which meets on June 14.
The most likely outcome for the next Government is a coalition between the ruling party Fianna Fail, the two Progressive Democrats, and some of the others (independents).
In relation to the Betfair market one would therefore assume that this would be the “-Any Other Party or Coalition”- option. However, on reading the rules, one sees that: “-Who will form the next government? Independents do not count for the purposes of this market.”-
So, we have the ridiculous situation, that those that backed a FF/PD coalition, expecting the PDs to do much better, will actually still be on a winner, because Independents are excluded from the market, even though the PDs will only form part of the next Government because of the presence of the Independents. And those that backed “-Any other party or coalition”- and did not read the rules will find themselves on a loser. Bizarre.
Previous blog posts by Chris F. Masse:
- The FaceBook profiles of the 2 most important men of the field of prediction markets
- THE HUMAN GADFLY WHOSE OBJECTIONS ROBIN HANSON IS DUCKING…???…
- Google now considers Midas Oracle as a major blog.
- Horizon 2015: A long-term strategic perspective for the real-money prediction markets
- Join our group at LinkedIn to have your “Prediction Markets” badge on your profile. It’s ‘chic’. (“Groups” info should be set as “visible”, in your profile options.) We are 63 this early Saturday morning —keeps growing.
- If you have been using PayPal to fund your InTrade, TradeSports or BetFair account, please, check that horror story.
- 48 hours after the launch of the “Prediction Markets” group at LinkedIn, we have already 52 members —both prediction market luminaries and simple people (trading the event derivatives or collecting the market-generated probabilities).
The Growth of Gambling and Prediction Markets: Economic and Financial Implications
Bruke Hansen:
[…] The day concluded with three papers covering prediction markets, the first by Robin Hanson, the world’-s leading proponent of prediction markets and former head of DARPA’-s notorious “-terror casino”-. Robin Hanson – futarchist, cryogenic enthusiast, and all around Kool Aid-chugger – is the son of Baptist preacher, and he brings to the cause an eerie religiosity. A former physics student, Hanson admits that he got a PhD in economics so people would take his ideas seriously: truly a cart-before-the-horse moment. One of the original attacks on the “-terror casino”- was that the market was too thin not to be manipulated, and could steer policy in the wrong direction. So what would a true believer do? Of course, Hanson’-s paper claimed that market manipulation actually makes markets more accurate, not less, by increasing the so-called “-noise”- of the market. Of course, like virtually all the presentations at the conference, this was concocted as nothing more than a laboratory experiment. Real statistics from futures exchange Intrade, for example – a conference sponsor, no less – were few and far between.
Totally unfair to Robin Hanson.
#1. Robin Hanson is indeed the world’-s “-reigning expert of the field of prediction markets”-…- FOR ALL THE GOOD REASONS NOT CITED BY THE REGISTER. See the Prediction Markets Timeline for more information.
#2. Robin Hanson is overly optimistic on his concept of “-decision markets”-, that is, complex conditional prediction markets used as a decision tool. Robin Hanson is wrong on the fact that there is a need for market-generated decisions, because the executives and politicians will never be willing to let a machine decide for them. That said, it’-s not much of a problem because all Robin Hanson’-s work on “-decision markets”- can be recycled for the “-decision-aid markets”-, that is, the step above the classic internal prediction markets that we know today.
#3. Yes, Robin Hanson can be out of whack sometimes, but, at the contrary, that’-s a plus: Craziness and creativity go hand in hand. Nobody gives the first fig about what Robin Hanson does on his free time. What we see, in the field of prediction markets, is that he thinks outside the box, being an new institution designer, for the benefit of us all.
#4. The comment on the 2000–2003 US DoD’-s DARPA’-s IAO’-s FutureMAP/Policy Analysis Market project is totally misinformed. The PAM project was sound. The only (very minor) valid criticism to make is that Robin Hanson insisted, wrongfully in my view, to focus on the Mid-East, where it’-s well know that the American traders have few advanced indicators. Other than that, let’-s not forget that PAM gave birth to a new technology, MSR, used today in three public prediction exchanges (Inkling Markets, WSX, and Media Predict) on top of being used at MicroSoft Research and by all Inkling’-s clients.
#5. As a blogger, let me say that Robin Hanson is good material for me. I can sometimes laud his ideas, and at other times ridicule his ludicrous views. Sometimes, I’-m wrong, and at other times, I may score a point against him. I don’-t have this liberty with Justin Wolfers, for instance. The only thing I could criticize in Justin Wolfers was his Australian accent, but I got a boo from my audience for picking him as a target. 
Previous: The Growth of Gambling and Prediction Markets: Economic and Financial Implications
NEXT: The truth on the 2000–2003 US DoD’s DARPA’s IAO’s FutureMAP/Policy Analysis Market project.
Michael Nutter wins Philadelphia mayoral primary.
Iowa Electronic Markets data. Very difficult to grasp —-InTrade-TradeSports and BetFair are more usable. This IEM monopoly is a scandal.
WikiNews: Michael Nutter wins Philadelphia mayoral primary.
Previous blog posts by Chris F. Masse:
- REBUTTAL: SalesForce, StarBucks and Dell demonstrate that enterprise prediction markets as intra-corporation communication tools (as opposed to forecasting tools) are overhyped by the prediction market software vendors and a little clique of uncritical courtisans.
- Comments are often more interesting than the post that ignited them.
- Harvard fella says prediction markets are doomed.
- How should prediction market firms (e.g., InTrade-TradeSports, BetFair-TradeFair) deal with Blogosphere’s criticism?
- BetFair’s future bet-matching logic
- If Midas Oracle were to meet, would we use Huddle, and why?
- WORLD’S SUCH A SMALL PLACE: Smarkets meet HubDub.
The Sim Exchange and Midas Oracle both made it in CNET News.
CNET News:
[…] It turned out that Shiau’-s predictions weren’-t perfect–-on average he was about 15 percent off on the sales of Nintendo’-s DS and Wii, Sony’-s PlayStation 3 and PlayStation Portable and Microsoft’-s Xbox 360. But he also wasn’-t that far off predictions from Wedbush Morgan’-s Michael Pachter, one of the most quoted industry analysts, who himself had been about 10.6 percent off sales on the same consoles. And a month earlier, Shiau’-s predictions had actually been better than Pachter’-s. Shiau had been off by about 15.8 percent, while Pachter had missed by 34.9 percent. […] “-Brian Shiau seems to have created a nascent and vibrant community,”- said Chris Masse, the author of Midas Oracle, a blog [*] about prediction markets. “-(There’-s) a strong emphasis on using the SimExchange as an educational tool to teach youngsters about the stock and futures mechanisms. I like this a lot.”- […] “-The biggest obstacle is that most people don’-t know what a prediction market is,”- said Shiau. “-So it’-s very difficult to pitch it to someone without them understanding how a stock market (provides useful information).”-
Previous: NPD releases April sales data, prediction market and analyst compared – by Brian Shiau
[*] a group blog on prediction markets –->- 49 posters –->- 192 posts from the guest authors
Previous blog posts by Chris F. Masse:
- VIDEO: Why Hillary Clinton will never be the Vice President of the United States of America.
- Any idea what Brad Stewart means with that logo that features a south-to-north rotation? — Does he want to put our Planet Earth upside down? — The real rotation occurs around an axis that connects the north and the south poles.
- Dick Morris (ex-strategist for Bill Clinton) devoted, not one, but two, strong columns against the Hillary-Clinton-as-VP scenario.
- What InTrade, TradeSports, BetFair, TradeFair, Betdaq, NewsFutures, Inkling Markets, Reality Markets, and HubDub, should implement real quick.
- Will we be able, one day, to trade our InTrade, TradeSports, BetFair and TradeFair event derivatives via our BlackBerry?
- FACEBOOK AND LINKEDIN: How to deal with unwanted friend requests, the ethics of de-friending, and other social networking etiquette predicaments.
- Don’t trade on the VP predictions markets. — Don’t bet on Hillary Clinton as VP. — Don’t listen to betting bloggers who tell you that Hillary Clinton has a chance to be on the Democratic ticket. — Don’t believe in “vice presidential selection committees”. — Select well your primary, advanced indicators. — Choose your bets carefully.
NPD releases April sales data, prediction market and analyst compared
Last month was the first month the simExchange (the free to play video game stock market game) has traded monthly hybrid futures contracts to predict NPD US video game sales data. In this trial run, trading on the simExchange appeared to be relatively more accurate than expert predictions. To quickly review, the following table depicts actual sales as reported by NPD Group, the prediction by trading on the simExchange, the error of the simExchange’-s forecast, the prediction by leading Wall Street firm Wedbush Morgan, and the error of Wedbush Morgan’-s forecast:
US Hardware March 2007
| Console | Actual Sales* | The simExchange** | Error | Wedbush Morgan*** | Error |
|---|---|---|---|---|---|
| Nintendo DS | 508k | 492.8K | -2.99% | 250K | -50.79% |
| Nintendo Wii | 259k | 385.0K | +48.65% | 400K | +54.44% |
| Microsoft Xbox 360 | 199k | 231.0K | +16.08% | 250K | +25.63% |
| Sony PlayStation Portable | 180K | 180.5K | +0.28% | 210K | +16.67% |
| Sony PlayStation 3 | 130k | 144.0K | +10.77% | 165k | +26.92% |
NPD has released its findings for US April 2007 video game sales. The following charts compare actual sales numbers determined by the NPD Group with forecasts from market trading on the simExchange and predictions by leading Wall Street analyst Michael Pachter of Wedbush Morgan.
US Hardware April 2007
| Rank | Console | Actual Sales* | The simExchange** | Error | Wedbush Morgan**** | Error |
|---|---|---|---|---|---|---|
| 1. | Nintendo DS | 471k | 548.9K | +16.54% | 450K | -4.46% |
| 2. | Nintendo Wii | 360k | 319.5K | -11.25% | 300K | -16.67% |
| 3. | Sony PlayStation 2 | 194k | Not listed | N/A | 250K | +29.87% |
| 4. | Sony PlayStation Portable | 183K | 190.4K | +4.04% | 200K | +9.29% |
| 5. | Microsoft Xbox 360 | 174k | 194.8K | +11.95% | 175K | +0.57% |
| 6. | Nintendo GameBoy Advance | 84k | Not listed | N/A | N/A | N/A |
| 7. | Sony PlayStation 3 | 82k | 107.3K | +30.85% | 100k | +21.95% |
| 8. | Nintendo GameCube | 13k | Not listed | N/A | N/A | N/A |
The simExchange did not trade monthly hybrid futures for game software this month. However, NPD’-s Top 10 is still relevant for comparing how trading on the simExchange is forecasting lifetime, global sales of the games.
| Rank | Title | Publisher | April Sales* | Lifetime Forecast** |
|---|---|---|---|---|
| 1. | Pokemon Diamond (DS) | Nintendo | 1.045M | 18.21M |
| 2. | Pokemon Pearl (DS) | Nintendo | 712K | 18.21M |
| 3. | Super Paper Mario (Wii) | Nintendo | 352K | 1.83M |
| 4. | Wii Play w/remote (Wii) | Nintendo | 249K | 4.90M |
| 5. | Guitar Hero 2 w/ guitar (Xbox 360) | Activision | 197K | 1.30M |
| 6. | Guitar Hero 2 w/ guitar (PS2) | Activision | 142K | Not listed |
| 7. | Spider-Man 3 (Xbox 360) | Activision | 117K | 1.07M |
| 8. | Spider-Man 3 (PS2) | Activision | 105K | 1.62M |
| 9. | God of War II (PS2) | Sony | 101K | 1.92M |
| 10. | MLB ‘-07: The Show (PS2) | Sony | 79K | Not listed |
Although data is still limited, initial predictions on the simExchange video game prediction market appear to be relatively accurate (compared with traditional predictors), and in some cases, absolutely accurate (compared with the actual result). The prediction market out performed the analyst on every prediction in March and was split in April.
Predictions on the simExchange should become more accurate over time as more accurate players are rewarded with more virtual currency for their accuracy (thereby enabling them to form more predictions) and less accurate players lose virtual currency (thereby discounting their ability to form more predictions).
Joining and playing the simExchange is completely free and does not involve any real money. To play, sign up here.
* NPD Group sales data
** The simExchange trading data
*** GameDaily Biz, April 13, 2007
**** GameDaily Biz, May 14, 2007
Cross posted from NPD releases April sales data, prediction market and analyst compared on the simExchange Official Blog.
Previously: Accounting sales of digitally downloaded games, Next lesson: so the “futures” aren’t really future, So what exactly are these “futures?”, The structure of the simExchange stocks and An invitation to join the simExchange beta.
Meet Mark Davies, BetFairs Managing Director (Corporate Affairs).
Mark Davies at LinkedIn
Previous blog posts by Chris F. Masse:
- Robin Hanson wants to rule the world —just as CEOs and heads of states do for a living.
- Predictify got funded… Great for those who will be hired… But is it a good thing, overall?
- Nassim Nicholas Taleb likens modern-day financial markets to medicine in the 1800s, when going to a hospital in London or Paris multiplied your risk of death by four times, he says. Similarly, quants increase risk by deploying flawed financial tools designed to reduce it, he argues.
- TradeSports-InTrade — Check Deposits
- BetFair Australia fought for free trade across Australian state boundaries… and won.
US DOJ searches financial records for traces of internet gambling and betting.
INTERNET BETTING AND GAMBLING: CRISIS #23,765
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Via Niall O’-Connor of Betting Market, The Register’-s Burke Hansen (a San Francisco attorney):
House of Cards. The American Department of Justice (DOJ) threw a spotlight on the murky underworld of internet gambling payment processing this afternoon with the indictment in Utah of seven individuals and four companies – including BetUs.com and serial violator BetonSports.com – involved with processing payments for online gambling transactions, according to the Associated Press. The indictment seeks to recover $150 million from the defendants under the Racketeering Influenced and Corrupt Organizations Act (RICO), in addition to hard assets such as real estate and property used in running the operations.
Ever since President Bush signed the Unlawful Internet Gambling and Enforcement Act (UIGEA) into law last October, internet gambling companies have been scrambling to process payments from frustrated American customers. […]
Although the UIGEA does not take effect until early July, major financial institutions pulled out of the American market almost immediately, forcing American gamblers and US–facing gambling suppliers to resort to increasingly roundabout methods of payment. […] Money laundering is just the disguising of the true nature of a financial transaction, and the convoluted payment systems allegedly developed by the defendants appear to qualify as that. […] Just how does the DOJ unravel these things? Although Tolman didn’t discuss that question, the DOJ most likely triangulates based on payment histories readily provided by American or foreign financial institutions. The DOJ could fairly quickly compare the payment history of a customer account formerly sending monthly payments directly to Bodog, for example, with more recent post-UIGEA history of the same account and guess with some accuracy where the gambling money now goes. […]
Frightening. 
Bob Hahn turns the PETITION into a CONSENSUS.
Bob Hahn turns lead into gold.
—-
Via Google’-s Bo Cowgill, Robert Hahn and Paul Tetlock’-s Op-Ed in the Wall Street Journal (mirror at AEI-Brookings – mirror at AEI):
[…] These markets often predict more accurately than experts. Why? They draw on the knowledge of people who might otherwise be ignored. Their anonymity frees participants from pressures to agree with opinion leaders. And they create straightforward profit incentives that encourage participants to search for better information. […] A consensus plan, endorsed by more than 20 leading researchers, including Nobel economics laureates Kenneth Arrow, Daniel Kahneman, Thomas Schelling, and Vernon Smith, and published by the AEI-Brookings Joint Center, suggests the creation of a safe harbor for small-stakes, not-for-profit prediction markets to encourage experimentation. One could, for example, introduce exemptions for research-focused markets in which the size of individual investments does not exceed $2,000 per participant. The Commodity Futures Trading Commission (CFTC) could provide this safe harbor in the form of a “-no-action”- letter. Alternatively, the commission could create formal guidelines that make it cheaper and easier to start these markets. […] Prediction markets have become more than fodder for television news features on what those zany Internet folks will think of next. They are coming of age as serious tools for information gathering and analysis —- tools with great potential for improving the efficiency of government and the productivity of industry. To help achieve that potential, Washington needs to nurture their development and keep them from becoming collateral damage in the endless war over who can gamble and where.
Step #1: Make some gullible economists sign a “-petition”-, entirely engineered by Bob Himself, and which is flawed and too timid.
Step #2: Make the gullible Wall Street Journal readers believe that a “-no-action letter”- is the solution, claiming that that’-s the “-consensus”-.
Robin Hanson, who is at heart a free-gambling-for-all economist, took part of this pitiful farce. Bad judgment, doc. If Robin Hanson wants to stay the “-reigning expert”- of the field of prediction markets, he will have to mind a more pertinent industry analysis in the future. Viva Steve Levitt.
Previous: Steve Levitt of Freakonomics: I WON’T SIGN YOUR PETITION, BOB. + Chris Masse’s comment on the Freakonomics’ blog post about the legality of US prediction markets + Safe Harbor Letter too Timid – by Chris Hibbert + The limitations of logic (and the need for passion) – by Caveat Bettor + Jason Ruspini on the Economists’ Petition