The Growth of Gambling and Prediction Markets: Economic and Financial Implications

Bruke Hansen:

[...] Steven Levitt, of Freakonomics fame, got the party started with a keynote address that gave his general opinion of the importance of gambling and prediction markets – namely, that in the grand scheme of things, they really aren’t all that important. A bit of a dribbler for a kickoff speech, true, but the point that prediction markets will remain on the fringe of policy analysis – more intellectual curiosity than serious policy formation tool – seems accurate. Levitt showed more interest in using limited prediction markets within organizations as a way to uncover information that members or employees are unwilling to disclose face to face.

Companies such as BestBuy [*] have started to utilize in-house prediction markets – where employees can win prizes by gambling on the outcome of certain company problems – to enhance the possibility that undiscovered employee knowledge will appear on the in-house market. Fair enough, but whether the information in the contracts is specific enough to be valuable was a question I tried without success to ask of Mr Levitt - BestBuy CEO’s favorite contract on its internal market was one that bet whether or not a particular store would open on time. The answer was no – useful to know perhaps, but not exactly the kind of information that will solve the problem of the store not opening on time.

There was a healthy dose of Kool Aid going around among some of the others, however. Since the conference was sponsored by Intrade, that didn’t really come as a surprise. Assertions about the accuracy of prediction markets got tossed around without always being backed up by the statistics themselves. That doesn’t mean that stats necessarily do not exist, but it would have been nice to hear fewer bald assertions about the accuracy of the models used.

In the afternoon session, Bob Erikson of Columbia University did one of the better presentations I saw, which compared the Iowa Election Market (IEM) with the predictions of pollsters for presidential elections going back to 1988.

The comparison between prediction markets and polls was clever because it really cut to the heart of the argument for the accuracy of prediction markets – namely, that people will be more honest when they have to put their money where their mouth is. The results were mixed, however; markets did somewhat better in some measurements, but in the most important question of a basic win/lose call, the pollsters have so far outperformed the market. [...]

[*] Best Buy is a Consensus Point client.

Previous: The Growth of Gambling and Prediction Markets Workshop starts today.