Decision Market?

There are at least two interpretations of what a decision market is. Some might may it is the use of a prediction market to support the making of a decision, e.g. “Given the confidence in snow at Christmas we’ll decide to increase the price of our ski package”.

Others might say that a decision market floats a question, and trade occurs in terms of the eventual answer which can either be provided by an external arbitrator, or can be inferred from the trade itself. The decision point could either be a preset date, or could be defined based on some trade dependent formula, e.g. quorum (>N traders), percentage threshold (>90% polarisation), trade volume falling below threshold, etc. A question might be “Were the moon landings faked?”

I’m a bit wet behind the ears when it comes to decision markets, so there may be a completely different definition I’ve not yet heard of.

For me, a decision market is like a vote except that people invest (risk) their interests or expectations in the outcome, and the outcome is itself determined in some manner from this collective investment of confidence. People’s reputations rise and fall depending upon the soundness of their judgement in the eyes of their peers.

Deciding predictions

With a prediction market someone has to decide when each event’s outcome can be determined, and what the outcome actually is.

I’ve wondered in the past whether this judgement is also something that can be determined collectively, i.e. by using a decision market. If it’s currently a cabal of good and worthy men answerable only to the favour of continued market participation, then they’re still indulging in a decision making process, investing their own mutual reputations and the reputation of their marketplace. Why not let anyone stake their own reputations?

In reading Chris Masse’s post Operational fusion reactor prediction market, the extensive nature of the “Judge’s Statement” he quotes reminded me of a notion I have that it may be possible to create an unmoderated prediction market, i.e. one where the participants come to their own conclusions as to when a predicted event can be determined, and what the eventual outcome is.

1. A prediction involves a future event.
2. A judgement as to whether the event has occurred involves a future decision.

So, how about a prediction market based on monetary currency, with a decision market (on the judgements of corresponding events) based on a reputational currency?

Initially one could simply have the decision market run in parallel with the central/trusted arbitrator. This may even help refine the heuristics used to extract a decision from traders in the decision market (although their behaviour is likely to be biased if used to determine outcome).

However, it may be that the arbitrator can ultimately be dispensed with and the judgement arbitrated entirely from the collective judgement one can infer from the way all participants in the decision market have staked their reputations.

The great thing about this would be that the market can then be self-regulating - needing no central arbitration authority.

The thing is, traders have a considerable interest in judgements of the outcome of predicted events adhering to reality – despite interest in their predictions being proved accurate. If they are happy to stake money on predictions, perhaps they will be happy to stake their reputations on deciding outcomes? That then leads to a question as to whether we can contrive a reputational currency that can be strongly associated with a trader’s actual reputation.

There are many other practical issues, e.g. should there be two decisions for each event: “Can the event outcome now be decided?” and “Has the predicted event occurred?”. Trading on the latter decision could be permitted only once the former decision had been determined (which may also suspend trading on the predicted event).

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• Decision-Making Tool vs. Decision-Aid Tool — Decision Markets Edition — REDUX
• Extracting Market Predictions from Financial Data: Is the ‘Surge’ Working?
• Predictocracy = Market Mechanisms for Public and Private Decision Making