Comments on: Are IBM Smarter Cities prediction markets too smart for people?

By: Chris F. Masse

Chris F. Masse — Thu, 10 Sep 2009 16:09:08 +0000

Hutch has posted this:

Spigit Prediction Markets
http://www.midasoracle.org/2009/09/10/spigit-prediction-markets/

By: Noam Danon

Noam Danon — Tue, 08 Sep 2009 18:43:59 +0000

Very mature answer Medemi… congratulations.

Despite that, I’ll take my chances and try again – inviting all scholars and prediction markets expert to participate and share from your experience –

what do you find to be the best solution for such a case?

Is it like Panos says – simply wait a long time?

By: Panos Ipeirotis

Panos Ipeirotis — Wed, 02 Sep 2009 21:37:37 +0000

Medemi, I get your point, also articulated by Noam: “the market relates to an event that is very far away, and thus it makes no sense to keep the market open until the answer is known.” I do not disagree that this is a problem. I do not disagree that there is a lot of value if someone manages to solve the problem. But such “early expiration, no verifiable outcome, self-referential markets” approach is not the solution.

My point is that having self-referential markets is not working. If you assume that players will not be strategic, then yes they may work. But I want to believe that the players that participate in such markets will be strategic. See http://www.wiserthanthecrowd.com/2009/09/lolmarkets-ibm-smarter-cities.html for such an example. He simply followed the strategy that I suggested. I do not believe that he read my comments to do that; it is just so natural.

Do you disagree with the “Keynesian beauty contest” idea? http://blog.mercury-rac.com/2009/08/30/starting-from-the-wrong-metaphor-prediction-markets-and-ideas/

You even admitted yourself earlier on that the markets are prone to manipulation. Did you mean something else?

By: Medemi

Medemi — Wed, 02 Sep 2009 19:32:46 +0000

>> I hate to stop this interesting ping-pong between you guys – let’s try to be productive here, shall we?

Noam, you’re an idiot. You accuse me of playing ping-pong, then you steal my idea.
Pay more attention next time.

Panos, you keep missing the point, presumably because you lack the experience and/or insight.

I have nothing more to say on this issue, because you people are hopeless.

By: Panos Ipeirotis

Panos Ipeirotis — Wed, 02 Sep 2009 15:22:42 +0000

Also take a look at http://blog.mercury-rac.com/2009/08/30/starting-from-the-wrong-metaphor-prediction-markets-and-ideas/ and read the pointed Wikipedia article on Keynesian Beauty contest. You will understand why the self-referential market that you suggest is not going to be a good idea.

By: Panos Ipeirotis

Panos Ipeirotis — Wed, 02 Sep 2009 14:00:21 +0000

Again, same problem: It pays to go with what the crowd will believe (albeit early), not what the actual outcome will be. In other words, there is no incentive for the contrarians to bet on outcomes that are not the early favorites. In your scenario, Hillary Clinton would have won the market for democratic nominee for the 2008 election if the market had stopped in November 2007, with a winning value of 70%.

If I interpret correctly what you suggest, this will be equivalent to a “prediction market on a prediction market”, aka “options on markets”: Guess where the price of a long term market will be at set points in the future, before the expiration of the long-term market. InTrade experimented with such contracts last Fall (the X contracts). I was initially fascinated. However, we soon realized that such markets do not offer much additional information: Current price of the long-term contract and time to expiration are enough to determine the optimal price of the “X” contract. See http://bit.ly/B1W9w

The solution: Bite the bullet and have a long-term contract, based on a verifiable outcome. If you are interested in having checkpoints along the way, use conditional prediction markets (e.g., see the tax features, conditional of the result of the presidential election). Or think harder of what you are trying to measure and build a contract that has a verifiable outcome early on.

By: Noam Danon

Noam Danon — Wed, 02 Sep 2009 08:58:31 +0000

let me offer the first twist to this:
lets say you have a simple yes/no question about an event that will occur 3 years from now.
At the expiration date, instead of determining the expiration value to be yes or no (100 or 0) – why not decide the value is the closing value? i.e., if the market said 75% for “Yes”, than that’s the actual outcome.
I know it is not ideal, but it still serves the puropose – it pays off more to bet early in the game, but it still pays off to place a bet at the last minute.

By: Noam Danon

Noam Danon — Wed, 02 Sep 2009 07:57:06 +0000

I hate to stop this interesting ping-pong between you guys – let’s try to be productive here, shall we?
of course, i fully agree – this is not a prediction market.

But – this is not the first time any of us dealing with prediction markets are faced with this challenge – the market relates to an event that is very far away, and thus it makes no sense to keep the market open until the answer is known.

So I would be very happy to hear: what solutions do you think will best fit this case?

By: Panos Ipeirotis

Panos Ipeirotis — Sun, 30 Aug 2009 05:55:08 +0000

“given that the SC markets will provide a final price and settlement as well.”

Well, they say the devil is in the details: How are they going to settle a market? You need a verifiable event in order to settle the market. This is at the very core of my argument. In order to trade on expectations you need a future event that will be used for the settlement, and on which the expectations are based.

Unless I am missing something, I do not remember any market that does not have a verifiable event for settlement purposes.

SmarterCities will not have such an event. So, I suspect, when they will close the market on Sep 13th, the winner will be the contract with the higher price. Completely self-referential, and hence self-reinforcing, and hence fad-enforcing.

Just for fun, here is the only self-referential contract that I know that is *not* self-reinforcing: http://www.hubdub.com/e/Market/Will_the_no_option_be_a_greater_percentage_than_the_yes_option_at_suspend_date_3126/view

By: Medemi

Medemi — Sun, 30 Aug 2009 00:45:28 +0000

>> I will repeat: The SmarterCities mechanism will be just a fad-reinforcing mechanism.

fad-reinforcing? The SmarterCities mechanism seems more susceptible to market manipulation. But despite all the potential hazards, I suppose my point is, that if the market can be traded with substantial amounts of money then it will be very powerful almost by definition. Relative to the polls, I think the SC mechanism adds a lot of value, given the proper implementation. I don’t have all the answers at this time as to what that should entail.

Your point is markets should always have a verifiable outcome. I’m not so sure. Traders trade on expectations. Those expectations are a reflection of their perceived reality. People don’t want to bet against the “truth” or general consensus or what they perceive to be the final price! because it will cost them money. Hence, the markets will have “a tendency” to “get close to the truth”, or better, what the public perceives to be the truth. This is not some hyped housing market or oil-derivative with run-away prices due to large institutions with vested interests.

Interestingly, betfair offer a beauty contest market. It’s a once a year event and the outcome is a bit of a lottery (so it seems), so the value of having a verifiable outcome seems limited to me other than for settlement purposes of course. Yet the market is very interesting to trade as people do their upmost best to turn it into some sort of science.

I’m sorry Panos, but I do see opportunities here, given that the SC markets will provide a final price and settlement as well.