Mihai Nadin (University of Texas, Dallas):
It’s Only A Game
Prediction markets of all kinds pop up all over the world. As betting animals, we human beings get a kick out of knowing better. The illusion of having known things before others did is even more seductive. Yes, in retrospect, we are all right. But contracts that yield payments based on figuring out outcomes of an event —How will a new product do? Will a new movie be a hit? Who will win the election? When will the “big one” hit California?— are not about perceptions after the fact. Their object is the future. For me, they are anticipations, realizations in the space of possibilities.
Informed by aggregated knowledge (or by an illusion of knowledge expressed as a more-or-less informed guess), prediction markets, unlike a crystal ball readings, were adopted by many organizations. Some of them were simply desperate —here the US Defense Department qualifies for the trophy. Others, such IBM or Hewlett Packard, rich enough to try yet some other innovation —a can’t-lose proposition. Think about Google —how many will adopt Chrome, a browser that compares, in their views, only to sliced bread? But, surprise-surprise, at Google trading became yet another program, a trading robot that made its inventor rich in Gooblers (the currency for betting at Google). Do you feel like competing with such a program? Keep in mind that in the stock market performance over the last few weeks loss in value always came in swings. For people in the prediction market, this afforded higher profits than a steadily climbing market would have. You don’t need to short (especially when it’s not looked upon very kindly) to make money. Algorithms are good at this nerve-racking game —make money on melting markets, while everyone else loses their shirts (savings for retirement, for tougher days, for college education, etc.). Actually, on Intrade during the short McCain upswing (or was it Obama’s downswing?—depends how you look at it) more money could have been made than on the final outcome.
The low error rate in prediction markets made them popular not only among people dealing in Gooblers, but also in dollars or euros. More important is whatever we derive from the dynamics of aggregation. In the first place, information that can be used proactively (to minimize the impact of certain events, or to prepare for new opportunities). This is where things get really interesting. What does it take to make the “dangerous little knowledge” dispersed among many to aggregate? Ego will not do. In the aggregate prediction market we are only a nameless bit. The answers to the question of what does it take to become part of the new lotteries so far converge towards incentives. You can read “greed” here instead, if you don’t faint at the thought that making money is an instinct that unfailingly overrides haughty ethical or religious pronouncements (never mind political demagoguery in a day and age of massive corruption).
Having said this, I remember asking Cass Sunstein why he ignored prediction markets as games in his successful Infotopia. If I had advised either McCain or Obama —no, not my desire to advise candidates— my medium of choice for their success would have been games. Yes, prediction markets can make some people —actually, very few— richer. But embodied in games, driven by real-life data, prediction markets can engage many more people in having fun, while simultaneously giving up, in the aggregation of competition, the tidbits of information they somehow, knowingly or not, own. Playing games is not gambling. Therefore, the regulatory gauntlet that keeps Intrade in Ireland could disappear. Provided that Intrade reconstitutes itself into an MMPORP (Massively Multiplayer Online Role-Paying game, for those who don’t recognize the abbreviation). How would Intrade resist the pressure of sharing the game playing data to some homeland security outlet is a question above my payrate (if you allow me the innocuous quote).
Easier said than done. But I, for one, see the prediction markets make the transition (sooner or later). Anyone want to bet on this?
