Just before Phase I commenced, I had designed and implemented a combinatorial market maker, and proposed that PAM use it. Charles Polk, president of Net Exchange, chose instead to refit their existing software to this application. [*] After the simulation failure at the end of Phase I, I threatened to quit. John Ledyard, CEO and founder of the firm, then got more involved in the project and proposed we run a laboratory horse race, between standard markets, my market maker, and a new combinatorial call market John would design. I designed the experimental environment in which the mechanisms were compared, Net Exchange created new software to run the mechanisms, and John ran the experiments with Caltech students.
Robin Hanson’s MSR won, of course:
In the interim phase, the Net Exchange team prepared for and ran lab experiments comparing two new combinatorial trading mechanisms with traditional mechanism. These experiments, where six traders set 255 independent prices in five minutes, found that a combinatorial market maker was the most accurate.
And today, the Market Scoring Rules (MSR) is the most popular mechanism design (and automated market maker) for enterprise prediction markets.
[*] CONCLUSION: Legacy is a big obstacle to innovation. Wanna innovate? Get rid of the past.
