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Journal of Predictions Markets: Special Issue on Corporate Applications

Koleman Strumpf — Tue, 28 Apr 2009 15:35:47 +0000

The current issue of the JPM focuses on the use of prediction and idea markets within firms. The papers stem from the Conference on Corporate Applications of Prediction/Information Markets held at the Kauffman Foundation on 1 November 2007.

The issue aims to provide an introduction to those new to the field as well as to describe some of the new and exciting applications within firms. The line-up, listed below, includes a real who’s who of companies using internal markets. There is also a commentary on each article written by some of the leading academics.

I hope many of the papers will be of interest to some of the readers here. And please do get in touch with me if you have questions or comments on the issue.

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Link to the special issue (JPM, Volume 3, Number 2)

Table of contents:

Introduction to Special Issue on Corporate Applications of Prediction Markets
Author: Strumpf, Koleman (Univ of Kansas)

The Innovation Engine at Rite-Solutions: Lessons from the CEO
Author: Lavoie, Jim (Rite-Solutions)

The Challenge of Incentive Alignment in the Application of Information Markets Within an Organization
Author: Hall, Art (Center for Applied Economics)

Examining Trader Behavior in Idea Markets: An Implementation of GE’s Imagination Markets
Authors: Spears, Brian; LaComb, Christina; Interrante, John; Barnett, Janet; Senturk-Dogonaksoy, Deniz (GE)

The Design of Idea Markets: An Economist’s Perspective
Author: Ottaviani, Marco (Kellogg School)

Hanson’s Automated Market Maker
Authors: Berg, Henry; Proebsting, Todd A. (Microsoft)

On Market Maker Functions
Author: Hanson, Robin (George Mason)

Inkling: One Prediction Market Platform Provider’s Experience
Author: Siegel, Adam (Inkling)

“The Emergence of Prediction Markets within Business Firms: A Skeptical Perspective from an Intrigued Academic.”
Author: Rhode, Paul W. (Univ of Arizona)

Private Prediction Markets and the Law
Author: Bell, Tom W. (Chapman)

Comment on Bell Article
Author: Litan, Robert E. (Kauffman Foundation and Brookings Institution)

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How much betting will we see?

Koleman Strumpf — Mon, 27 Oct 2008 23:32:54 +0000

There is almost always a huge run-up in betting activity on prediction markets right before and during an event (this is equally true for sports as well as elections). In my posting about this over at Betfair’s new blog, I show that in the 2004 Presidential cycle over half of all bets were made on election day.

What do folks think will happen over the week leading up to 4 November (seems like a great time for a market)? If we see a repeat of 2004, there will be tens of millions of dollars traded at the leading exchanges. Of course the last election was expected to be closed than the current one, so maybe there will not be so much activity.

Assuming there is a big surge in volume, what would be the appropriate trading strategy to use? I can think of several standard derivative strategies to take advantage of price volatility, but am curious to hear suggestions from more experienced traders.

The Value of Tom Brady?

Koleman Strumpf — Tue, 09 Sep 2008 00:47:21 +0000

New England Patriots’ quarterback Tom Brady suffered a season-ending injury during yesterday’s game with the Kansas City Chiefs. After he left the game and before the extent of the injury was known, the TradeSport’s contract on whether the Pats would win the Super Bowl fell about 5 points (from 21 to 16). Then at about 6:30pm ET Yahoo Sports posted a story that he was done for the year and the price collapsed. It has now stabilized at about 8, so the injury experiment suggests that a healthy Brady was worth about 13 points in this market.[*] I hope his agent is paying attention.

[*] Possibly understates Brady’s value since there were already concerns about his health prior to the injury.

link: Tradesports NE Pats market

Arbitrage in the InTrade Dem VP Market

Koleman Strumpf — Tue, 19 Aug 2008 07:34:35 +0000

There has been an unexploited arbitrage opportunity in the Intrade Democratic VP market (“2008 Democratic VP Nominee (others upon request)”). As the attachment shows, you can sell the slate of candidates for 123.2 (just sum the bids) while you will only have to payout 100. This possibility has existed for at least three weeks, and is particularly puzzling now given that the announcement is likely to occur this week.

What is also a bit odd is that Intrade has another market (“2008 Democratic Vice-Presidential Nominee (with Field contract)”) on the same outcome which includes a catch-all field contract which does not have the same arb–again see the attachment below. It is substantially cheaper to buy the field contract in the second market than the omitted candidates (Kaine, Sebelius, Hagel, Schweitzer, Gephardt, Kerry, and others) in the first market.

Any thoughts on why this is occurring?

attachment: intradedemvp_summedbidsexceed100.pdf

Prediction Markets in the Classroom: Inkling Markets

Koleman Strumpf — Fri, 09 May 2008 14:00:48 +0000

hile prediction markets have been in the spotlight this year, they are still unfamiliar to many folks. As one small step towards improving their visibility, along with my colleague James Lemieux I ran a prediction market at the University of Kansas School of Business. The markets ran for three and a half months and almost all traders were undergraduate business majors (you can see the very end stages of the market at: http://kufin400.inklingmarkets.com, username: myfoxkc and password: myfoxkc).

These markets were quite popular. The 475 traders made over 27,000 transactions in the 139 available markets. As a matter of reference, that is about 200 transactions per market while in Google’s market this ratio is 260.

There was a mix of both socially redeeming topics (issues of interest to the Business School such as how many internships the undergrads would get this school year) and others designed to attract interest (politics, sports, entertainment, finance). I was surprised to see that passions– and trade volume– ran quite high even in the more serious markets. For example, one contract’s expiry was based on whether the XM-Sirius merger would be consummated by March. When the DOJ announced its approval at the end of that month, there was only a small price increase. As the comments below suggest, this was not because the traders were asleep at the wheel but rather because they had a good understanding of the regulatory environment.

Inkling Markets provided the platform for our markets (if you are unfamiliar with Inkling, they have active public markets which you can sample). Inkling’s software and support is really ideal for classroom markets. There are nice features for both the people running the markets (James and I) as well as for traders (the students).

For the market admin:

- it is a snap to set-up and administer new contracts

- Adam Siegel and Nate Kontny are very responsive to questions, often responding within the hour

For traders:

- an intuitive trade interface, which is accessible even for those without experience with financial markets (though this can be a drawback if you would also like students to become familiar with order books)

- lots of goodies (customizable profile pages, market-specific discussion boards, graphs) leads students to visit the market a lot

- the daily/weekly top traders list encourages participation

I would strongly recommend others give prediction markets in the classroom a try. I found them to be both a great pedagogical tool and also one which the students really, really like. Students learned first hand about the role of information discovery as well as the biases often seen in prediction markets (though I will add it was difficult to illustrate the home town bias given the success of the athletic teams at my school this year). Feel free to get in touch with me if you have questions about how to set-up your own classroom markets.

Slides of presentations from Conference on Corporate Applications of Prediction/Information Markets (1 November), Kansas City

Koleman Strumpf — Wed, 28 Nov 2007 09:41:37 +0000

The speakers’ presentations are now available in pdf format on the conference webpage,

http://people.ku.edu/~cigar/PMConf_2007.

I intend to keep this page in place, so feel free to bookmark it and use it as a resource.

Summary of Conference on Corporate Applications of Prediction/Information Markets (1 November), Kansas City

Koleman Strumpf — Mon, 05 Nov 2007 10:16:38 +0000

A summary of the talks at last week’s conferences is available here,

http://people.ku.edu/~cigar/PMConf_2007/PMConference_Notes.html.

Additional information will be posted in the near future.

Reminder: Corporate Applications of Prediction Markets Conference (1 November)

Koleman Strumpf — Thu, 25 Oct 2007 07:49:51 +0000

The conference will be held next Thursday (1 November) at the Kauffman Foundation in Kansas City. All of the details are available on the conference webpage (http://people.ku.edu/~cigar/PMConf_2007) and the schedule is listed below.

I am pleased to note that Mat Fogarty (Founder and CEO, Xpree) and Alexander Costakis (Managing Director, HSX) have been added to the program.

Please get in touch with me (cigar@ku.edu) if you are interested in attending or have any questions.

Schedule

8:30 Registration, Coffee, Opening Remarks

9:00 Lessons from Corporate Applications of Prediction Markets

Henry Berg, Microsoft

Discussant: Robin Hanson (George Mason Department of Economics)

Christina Ann LaComb, GE (The Imagination Market; abstract is free, text is gated)

Discussant: Marco Ottaviani (Kellogg School of Management, Management and Strategy)

10:45 Coffee Break

11:00 Lessons from Corporate Applications of Prediction Markets (cont)

Dawn Keller, Best Buy (Best Buy’s TAGTRADE Market)

Discussant: Paul Rhode (Department of Economics. Eller College of Management, University of Arizona)

Bo Cowgill, Google (Putting Crowd Wisdom to Work)

Discussant: Eric Zitzewitz (Dartmouth Department of Economics)

12:45 Lunch

Keynote address: Jim Lavoie, Co-Founder and CEO, Rite-Solutions

1:45 Lessons from Prediction Market Organizers and Operators

John Delaney, Founder and CEO, Intrade

David Perry, Co-Founder and President, Consensus Point

Mat Fogarty, Founder and CEO, Xpree Inc

3:15 Break (refreshments)

3:30 The Legal Playing Field

Tom W. Bell, Chapman University School of Law

Discussant: Robert E. Litan (VP Research and Policy at the Kauffman Foundation, Senior Fellow at the Brookings Institution, Director of the AEI-Brookings Joint Center on Regulatory Studies)

4:15 General Discussion

Alexander Costakis (Managing Director, Hollywood Stock Exchange) will also be available to answer questions and may make a short presentation.

Conference: Corporate Applications of Prediction/Information Markets (Thursday, 1 November 2007)

Koleman Strumpf — Mon, 17 Sep 2007 10:09:58 +0000

I have organized a conference on corporate prediction markets which may be of interest to Midas Oracle readers. It will take place on 1 November at the Kauffman Foundation in Kansas City. All of the details are available on the conference webpage (http://people.ku.edu/~cigar/PMConf_2007/PredictionMarketsConference.html) with some background available on the conference flier (http://people.ku.edu/~cigar/PMConf_2007/PredictionMarketsConference_Flier.html). Note that this is a free conference but you should get in touch with me if you plan on attending.

The preliminary schedule is listed below:

Schedule

8:30 Registration, Coffee, Opening Remarks

9:00 Lessons from Corporate Applications of Prediction Markets

Henry Berg, Microsoft

Discussant: Robin Hanson (George Mason Department of Economics)

Christina Ann LaComb, GE (The Imagination Market; abstract is free, text is gated)

Discussant: Marco Ottaviani (Kellogg School of Management, Management and Strategy)

10:45 Coffee Break

11:00 Lessons from Corporate Applications of Prediction Markets (cont)

Dawn Keller, Best Buy (Best Buy’s TAGTRADE Market)

Discussant: Paul Rhode (Department of Economics. Eller College of Management, University of Arizona)

Bo Cowgill, Google (Putting Crowd Wisdom to Work)

Discussant: Eric Zitzewitz (Dartmouth Department of Economics)

12:30 Lunch

Keynote address: Jim Lavoie, Co-Founder and CEO, Rite-Solutions

1:45 Lessons from Prediction Market Organizers and Operators

John Delaney, Founder and CEO, Intrade

David Perry, Co-Founder and President, Consensus Point

3:00 Break (refreshments)

3:15 The Legal Playing Field

Tom W. Bell, Chapman University School of Law

Discussant: Robert E. Litan (VP Research and Policy at the Kauffman Foundation, Senior Fellow at the Brookings Institution, Director of the AEI-Brookings Joint Center on Regulatory Studies)

4:00 General Discussion

6:30 Dinner

Location TBA

Copernican Principle: How To Predict the End of the World

Koleman Strumpf — Wed, 18 Jul 2007 01:23:44 +0000

John Tierney’s column the Science section of today’s New York Times discusses a method for forecasting difficult to predict events. The Copernican Method, advocated by Princeton physicist Richard Gott, allows one to generate confidence intervals that an event will occur using only the duration time until now (that is, how long the event has been at risk but has not occurred). Using the often not realistic assumption that there is nothing special about today, one can derive the ninety-five percent confidence interval for the time until the event occurs,

(1/39)*t_past < t_future < 39*t_past

where t_past is the duration time so far and t_future is the stochastic time until the event occurs.(*) Intuitively, events for which we have not observed a failure for a long-time are more likely to persist than ones which have only been in existence for a short time period. The article (along with the original Gott (1993) piece) give many examples of his formula at work such as how long Stonehenge will remain standing to how long political leaders will stay in power.

I remember reading the New York Times column in 1993 which first discussed this approach (sorry may be gated) and finding this to be not very convincing. Think about the Doomsday case. Of course today is quite different from the past: the events which could have led to man’s extinction in the past (largely exogenous natural events) are quite different from the dangers of today and the future (man-made events). But I always find data convincing. The NYT article claims that Gott made accurate forecasts of political tenure and the closing date of Broadway plays though I have been unable to track down the original predictions myself.

Well I doubt this will be of any use to folks investing in prediction markets. It has been about seven years since the last Democratic president. Applying Gott’s formula, this means with ninety-five percent accuracy we can say that the next Democratic administration will begin at least two months from now and no more than 273 years from now. I think we do not need a formula to figure that out.

(*) See Monton and Kierland (2006) for a derivation