Comments continue to trickle in at the U.S. CFTC, in response to the agencies request for comments on its “concept paper on event contracts.” You can find the comments posted so far, all seven of them, on the CFTC’s website. Likely many more comments will be filed around the July 7 deadline, and show up online a few days later.

One of the questions that the CFTC asks is, “What public interests are served by event contracts?” In the most recent comment posted by the CFTC, economist John Blank addresses that question as follows:

Information aggregation is a costly exercise for private individuals, small businesses, large businesses, government entities, and policy makers operating without the benefit of public, transparent information. Critical information is provided by market transactions that are disseminated. So, matching trades for the purpose of information aggregation in event markets, when it is done in the public market context, is far more preferable than having this information available only to those who can pay for it; or who undertake a large enough, and constant enough, and varied enough, number of the relevant commercial transactions themselves.

Large companies with numerous, varied, high-stakes commercial transactions — that is to say, companies that should have a pretty good idea of the market value of the commodities that they deal with — nonetheless find it useful to spend a lot of money on industry price reports. They want to know not only what they pay and are paid, they want to know what other people are paying for the kinds of stuff they buy and sell. When commodities are traded on exchanges offering public price data, the cost of getting that data goes way down for everyone. The result is that companies large and small can use resources more efficiently, i.e., produce more things that people want in the least expensive manner.

As Blank notes elsewhere in his short comment, we have moved from an economy based predominantly on raw materials and produced goods to an economy based on information and services. Event contracts can aid in the discovery and evaluation of information about information, and in today’s economy that kind of information can be a most valuable commodity.

FEED ITEM FOOTER

Midas Oracle .ORG = Site Map + Archives + Best + Charts + Exchanges + Software + Links + Network + LinkedIn + FB + Shared Items + Login + Register + Status + Write A Post Or A Page + How To Publish

• Prediction markets are about lowering transaction costs. That’s how sports come in.
• CFTC Requests Public Input on Possible Regulation of “Event Contracts” —a.k.a. event derivative markets, event futures markets, betting markets, bet markets, prediction markets
• CFTC regulation and election contracts
• CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts
• The CFTC is going to close the comments in 4 days. We have 4 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges (e.g., InTrade USA or BetFair USA), and counter the puritan and sterile petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, the bright masterminder of the Iraq war).
• The CFTC is going to close the comments in 5 days. We have 5 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges (e.g., InTrade USA or BetFair USA), and counter the puritan and sterile petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, the bright masterminder of the Iraq war).
• The CFTC is going to close the comments in 3 days. We have 3 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges (e.g., InTrade USA or BetFair USA), and counter the puritan and sterile petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, the bright masterminder of the Iraq war).

ShareThis

I haven’t turned up the latest edition of Science magazine mentioned yesterday by Chris F. Masse, but a version of the Science article “The Promise of Prediction Markets“, is available from the AEI Center for Regulatory and Market Studies (find link to article on this page).

The first thing of note is that the extensive list of authors overlaps that of the “Statement on Prediction Markets” of a year ago (but lacking Statement signers Daniel Kahneman, Charles R. Plott, and Shyam Sunder). A quick scan of the piece reveals it pursues that same controversial strategy as the earlier statement - seeking CFTC safe harbor protection for a limited set of small stakes, non-profit prediction market exchanges.

We would therefore urge the CFTC to explore other approaches to ensuring safe harbors, for example, formal rules or guidance approved by the commission.

We suggest that three types of entities be eligible for safe harbor treatment. The first would be not-for-profit research institutions, including universities, colleges and think tanks wishing to operate exchanges similar to the Iowa Electronic Markets. The second would be government agencies seeking to do research similar to that of nongovernmental research institutions. The third group would consist of private businesses and not-for-profits that are not primarily engaged in research, which would only be allowed to operate internal prediction markets with their employees or contractors.

In all cases, markets would be limited to small-stakes contracts. Although the definition of small stakes is somewhat arbitrary, we use the term to mean an exchange in which the total amount of capital deposited by any one participant may not exceed some modest sum, perhaps something like $2,000 per year.

The exchanges themselves would be not-for-profit but would be allowed to charge modest fees to recoup administrative and regulatory costs. Brokers and paid advisers would be barred, reducing the risks that contracts would be sold to inappropriate or vulnerable customers or that customers would be charged fees above the amounts needed to maintain the markets. Exchanges would be self-regulated, leaving them with the responsibility to make reasonable efforts to keep markets free from fraud and manipulation.

For its part, the CFTC should allow contracts that price any economically meaningful event. This definition could allow for contracts on political events, environmental risks, or economic indicators, such as those offered by the Iowa Electronic Markets, but would presumably not include contracts on the outcomes of sports events.

… Congress should support the CFTC’s efforts to develop prediction markets.

And so on.

Maybe this is the best strategy for gaining political protection for progress, it is a difficult judgment to make. But the Science magazine placement is high profile and will certainly help raise the issue among folks who might otherwise be unaware of the need for progress on this front.

Perhaps more comments after I’ve had a change to read the piece more carefully. No doubt by then Chris F. Masse and the hard-core PM crowd will have, in their wisdom, torn this timid suggestion to shreds.

FEED ITEM FOOTER

Midas Oracle .ORG = Site Map + Archives + Best + Charts + Exchanges + Software + Links + Network + LinkedIn + FB + Shared Items + Login + Register + Status + Write A Post Or A Page + How To Publish

• The CFTC safe-harbor option for event markets
• The American Enterprise Institute’s proposals to legalize real-money prediction markets in the United States of America
• In the for-profit vs not-for-profit debate, our prediction market luminaries, doctored by Bob, are on the wrong side of the issue.
• A historical Robin Hanson fanboy can’t believe his hero signed Bob’s ill-informed and unwise petition.
• Our prediction market luminaries signed Bob’s petition —and the losers are InTrade, TradeSports and BetFair.
• Let Prediction Markets Fight Terrorism.
• Building Exits into CFTC Regulation

ShareThis

As noted here in multiple posts over the past few days, the U.S. Commodity Futures Trading Commission is thinking about prediction markets. Last week it released a “Concept Release on the Appropriate Regulatory Treatment of Event Contracts” and invited public comments on several questions as it attempts to sort out its proper role, if any, in overseeing such markets.

Formal comments are due July 7 at the CFTC. Informal comments are already springing forth: see, for example, reactions by David Pennock, Chris Masse, and Chris Hibbert. Likely more to come.

My preliminary reaction is to be encouraged. Growth of the industry in the United States is frustrated by a lack of clarity over the CFTC’s role. If real money event contract markets are to become serious business in the United States, the government will have to figure out where these markets fit in the legal and regulatory world. The CFTC is taking a step toward figuring these things out. If CFTC’s conclusions turn out to be too burdensome, then appeals can by made – to the Commission itself, to courts, or to Congress. But the process has to start somewhere.

Whether their next steps are in the right direction, who knows. I think that their steps are more likely to be in the right direction if they get high quality comments filed by prediction market proponents.

(On Knowledge Problem I’ve put up a much longer post which explains the CFTC concept paper in more detail and does a little bit of sorting through the questions asked. Readers here who have already looked at the concept paper will not learn much new, but you are still welcome to take a look.)

FEED ITEM FOOTER

Midas Oracle .ORG = Site Map + Archives + Best + Charts + Exchanges + Software + Links + Network + LinkedIn + FB + Shared Items + Login + Register + Status + Write A Post Or A Page + How To Publish

• The CFTC is going to close the comments in 12 days. We have 12 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges, and counter the evil petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, the bright masterminder of the Iraq war).
• The CFTC is going to close the comments in 11 days. We have 11 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges, and counter the evil petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, the bright masterminder of the Iraq war).
• The CFTC is going to close the comments in 14 days. We have 14 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges, and counter the evil petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, the bright masterminder of the Iraq war).
• The CFTC is going to close the comments in 13 days. We have 13 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges, and counter the evil petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, the bright masterminder of the Iraq war).
• The CFTC is going to close the comments in 4 days. We have 4 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges (e.g., InTrade USA or BetFair USA), and counter the puritan and sterile petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, the bright masterminder of the Iraq war).
• The CFTC is going to close the comments in 10 days. We have 10 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges (e.g., InTrade USA or BetFair USA), and counter the puritan and sterile petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, the bright masterminder of the Iraq war).
• The CFTC is going to close the comments in 3 days. We have 3 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges (e.g., InTrade USA or BetFair USA), and counter the puritan and sterile petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, the bright masterminder of the Iraq war).

ShareThis

Tyler Cowen picks the market consensus over book-writing pundits:

Either the current market estimate of inflation is the best estimate available, or you know that it is wrong and you will be a very rich man. I find the former scenario more plausible.

Cowen is commenting on the Kevin Phillips book, Bad Money, recently out.

Of course book authors may be wary of going directly into the financial markets to wager their hard earned cash, which is why I have advocated prediction markets for pundits in which authors would have a chance to back their book-selling punditry with real money.

In Separating cheap talk from truly held beliefs, I wrote of political pundits with books:

Maybe they believe what they write, and would be willing to subsidize a prediction market out of their book royalties to demonstrate the strength of their convictions. Or how about the books from the current crop of U.S. presidential candidates—I wonder if these books contain any claims that are specific and substantive enough to be either true or false.

If such punditry-based prediction markets were common, mistaken-but-honest demagogues (those pundits who actually believe what they write, and are willing to stand behind it) would end up subsidizing more thoughtful analysts participating in the markets; correct honest demagogues would end up taking home larger financial rewards; and dishonest demagogues would dissemble, seek to avoid being pinned down on specific claims, and when pressed for actionable claims they would run and hide.

[Cross posted from Knowledge Problem]

FEED ITEM FOOTER

Midas Oracle .ORG = Site Map + Archives + Best + Charts + Exchanges + Software + Links + Network + LinkedIn + FB + Shared Items + Login + Register + Status + Write A Post Or A Page + How To Publish

• Separating cheap talk from truly held beliefs
• Could Pat Buchanan’s socio-economic ramblings lead to the creation of socially interesting, long-term prediction markets?
• The process of writing a book favors introverts and the process of promoting a book favors extraverts.
• TYLER COWEN’S BOOK - Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist.
• Enthusiasm and Arbitrage Opportunities at Media Predict
• Prediction Market Accuracy — Jason Ruspini talks back to Barry Ritholtz.
• WordPress is a bit like WikiMedia (the software powering Wikipedia), now.

ShareThis

At Overcoming Bias, Eliezer Yudkowsky invites pundits, partisans, and anyone else with a nascent opinion about the limits of prediction markets to, in effect, put up or shut up. (Though he puts it in somewhat nicer words). Here is a selection, but read the whole thing:

If you think that Hillary is going to do better than the polls on Super Tuesday, and you’re going to sneer afterward and say that Intrade was “just tracking the polls”, buy Hillary now.

If you think that Obama is going to do better than the polls on Super Tuesday, and you’re going to gloat about how prediction markets didn’t call this surprise in advance, buy Obama now.

…

The point is not that prediction markets are a good predictor but that they are the best predictor. … If prediction markets react to polls, they’re getting new information, that they didn’t predict in advance, which happens. Being the best predictor doesn’t make you omniscient.

Everyone’s going to find it real easy to make a better prediction afterward, but if you think you can call it in advance, there’s FREE MONEY GOING NOW.

Buy now, or forever hold your peace.

FEED ITEM FOOTER

Midas Oracle .ORG = Site Map + Archives + Best + Charts + Exchanges + Software + Links + Network + LinkedIn + FB + Shared Items + Login + Register + Status + Write A Post Or A Page + How To Publish

• Super Tuesday, The Morning After — Wednesday Morning US Presidendial Elections To Death
• The 2008 Super Tuesday charts
• The New Hampshire Hypothesis
• Professor Koleman Strumpf tells CNN that a prediction market, by essence, can’t predict an upset.
• InTrade is no psychic —but what if that bit of truth is systematically said BEFORE, as opposed to AFTER.
• ABC 20/20 featuring InTrade on May 9, 2008 — 10:00 pm ET
• Five Reasons the Prediction Market Critics Are Wrong.

ShareThis

Last year while working out a few thoughts on arbitrage opportunities in basketball tournament prediction markets at Inkling, it occurred to me that the Inkling pricing mechanism was just a little bit off for such applications. The question is whether something better can be done. An answer comes from the folks at Yahoo Research: yes.

Inkling’s markets come in a couple of flavors, so far as I know all using an automated market maker based on a logarithmic market scoring rule (LMSR). In the multi-outcome case – for example, a market to pick the winner of a 65-team single elimination tournament – the market ensures that all prices sum to exactly 100. If a purchase of team A shares causes its share price to increase by 5, then the prices of all 64 other team shares will decrease by a total of 5.

The logic of the LMSR doesn’t tell you exactly how to redistribute the counter-balancing price decreases. In Inkling’s case they appear to redistribute the counter-balancing price movements in proportion to each team’s previous share price (so, for example, a team with an initial price of 10 would decrease twice as much as a team with a previous price of 5). While for generic multi-outcome prediction markets this approach seems reasonable, it doesn’t seem right for a tournament structure. (I raised this point in a comment posted here at Midas Oracle last September, and responses in that comment thread by David Pennock and Chris Hibbert were helpful.)

The problem arises for pricing tournament markets because the tournament structure imposes certain relationships between teams that the generic pricing rule ignores. Incorporating the structure into the price rule in principle seems like the way to go. Robin Hanson, in his original articles on the LMSR, suggests a Bayes net could be used in such cases. Now three scientists at Yahoo Research have shown this approach works.

In “Pricing Combinatorial Markets For Tournaments,” Yiling Chen, Sharad Goel and David Pennock demonstrate that the pricing problem involved in running a LMSR-based combinatorial market for tournaments is computationally tractable so long as the shares are defined in a particular manner. In the abstract the authors report, “This is the first example of a tractable market-maker driven combinatorial market.”

An introduction to the broader research effort at Yahoo describes the “Bracketology” project in a less technical manner:

Fantasy stock market games are all the rage with Internet users…. Though many types of exchanges abound, they all operate in a similar fashion.

For the most part, each bet is managed independently, even when the bets are logically related. For example, picking Duke to win the final game of the NCAA college basketball tournament in your online office pool will not change the odds of Duke winning any of its earlier round games, even though that pick implies that Duke will have had to win all of those games to get to the finals.

This approach struck the Yahoo! Research team of Yiling Chen, Sharad Goel, George Levchenko, David Pennock and Daniel Reeves as fundamentally flawed. In a research project called “Bracketology,” they set about to create a “combinatorial market” that spreads information appropriately across logically related bets.…

In a standard market design, there are only about 400 possible betting options for the 63-game [sic] NCAA basketball tournament. But in a combinatorial market, where many more combinations are possible, the number of potential combinations is billions of billions. “That’s why you’ll never see anyone get every game right,” says Goel.…

At its core, the Bracketology project is about using a combinatorial approach to aggregate opinions in a more efficient manner. “I view it as collaborative problem solving,” Goel explains. “This kind of market collects lots of opinions from lots of people who have lots of information sources, in order to accurately determine the perceived likelihood of an event.”

Now that they know they can manage a 65-team single elimination tournament, I wonder about more complicated tournament structures. For example, how about a prediction market asking which Major League Baseball teams will reach the playoffs? Eight teams total advance, three division leaders and a wild-card team from the National League and the same from the American League. The wild-card team is the team with the best overall record in the league excepting the three division winners.

In principle the MLB case seems doable, though it would be a lot more complicated that a mere 65-team tournament that has only billions of billions of possible outcomes.

[NOTE: A longer version of this post appeared at Knowledge Problem as “At the intersection of prediction markets and basketball tournaments.”]

FEED ITEM FOOTER

Midas Oracle .ORG = Site Map + Archives + Best + Charts + Exchanges + Software + Links + Network + LinkedIn + FB + Shared Items + Login + Register + Status + Write A Post Or A Page + How To Publish

• Combinatorial markets for independent events: Flawed use of approach hampers price discovery
• CNN Political Market = soon, the Planet Earth’s most traded play-money prediction exchange —after HSX.
• The Media Predict startup is smarter than the Inkling-Giberson conglomerate.
• THE DAY ROBIN HANSON FOUGHT FOR HIS BABY
• Inkling’s Dead Radiohead Market
• Prediction market sessions of the O’Reilly Money-Tech Conference suffer fatally from the absence of the world’s most knowledgeable, most innovative and most trustworthy prediction market expert.
• PREDICTION MARKETS + TV = a recipe for success

ShareThis

I think all the excitement over the New Hampshire prediction market prices is creating another “Pentagon moment” for the concept. A lot of attention is being paid to prediction markets, and it looks bad, but ultimately it will turn out just fine.

Consider that the criticism is a product of high expectations — people are complaining that, contrary to expectations, the markets were not better than the polls. People are noticing that prediction markets are not perfect. People all over the place are arguing about prediction markets.

It may look bad, but to me it appears as if there is a broad base of awareness and relatively high expectations out there that wasn’t evident in the press six months ago. Furthermore, a lot of people who hadn’t thought too much about prediction markets have now had the topic thrust in front of them.

It will turn out more than “just fine” for prediction markets – the market for prediction markets will continue to grow. It may look like a very public black eye, but that is because political prediction markets are now in the fight.

FEED ITEM FOOTER

Midas Oracle .ORG = Site Map + Archives + Best + Charts + Exchanges + Software + Links + Network + LinkedIn + FB + Shared Items + Login + Register + Status + Write A Post Or A Page + How To Publish

• Prediction markets are forecasting tools of convenience that feed on advanced indicators.
• The BetFair blog claims a worldwide victory.
• Yet another guy, writing about prediction markets in the mainstream media, who does not master what he is talking about.
• Terrorism Futures
• Ubber finance blogger Barry Ritholtz believes in magic. He believes that, with more volumes on the event derivative markets, comes the Omniscience —capital “O”.
• Let’s face it. The political world doesn’t give the first fig about the prediction markets, InTrade, BetFair, Betdaq, NewsFutures, HubDub, Robin Hanson, Justin Wolfers, and the rest of our little clique.
• THE DAY ROBIN HANSON FOUGHT FOR HIS BABY

ShareThis

Chris Masse has already linked to The Economist story on futurists, which ends with a plug for prediction markets:

The most heeded futurists these days are not individuals, but prediction markets, where the informed guesswork of many is consolidated into hard probability. Will Osama bin Laden be caught in 2008? Only a 15% chance, said Newsfutures in mid-October 2007. Would Iran have nuclear weapons by January 1st 2008? Only a 6.6% chance, said Inkling Markets. Will George Bush pardon Lewis “Scooter” Libby? A better-than-40% chance, said Intrade. There may even be a prediction market somewhere taking bets on immortality. But beware: long- and short-sellers alike will find it hard to collect.

Like Chris, I’m partial to the plug for prediction markets, but the story from the past year that best fits the five pieces of advice to futurists in the article (think small, think short-term, admit uncertainty, embed in an industry, and listen more) was not about the “wisdom of crowds.” Rather, this profile by Michael Lewis of hedge fund entrepreneur/insurance risk modeler John Seo in the NYT Magazine seems to fit the bill.

[NOTE: This post is a somewhat revised version of a posting on Knowledge Problem: What will futurists do in the future? Chris has also already linked to the story on John Seo that was published in August 2007.]

FEED ITEM FOOTER

Midas Oracle .ORG = Site Map + Archives + Best + Charts + Exchanges + Software + Links + Network + LinkedIn + FB + Shared Items + Login + Register + Status + Write A Post Or A Page + How To Publish

• WET BLANKET OR BUBBLE BUSTER? — Charles Plott (a big-shot economist) condemns all the hype surrounding the prediction markets and the wisdom of crowds.
• Prediction markets = “the future of journalism” —said, from day one, Emile Servan-Schreiber of NewsFutures. Emile, if you have balls, let’s do it —all together.
• Decision Markets and Futarchy are solutions in desperate search for a problem to solve and for their early adopters… and that may stay that way well after Robin Hanson’s head gets cryogenized.
• ROBIN HANSON: Prediction markets are not about the wisdom of crowds…
• The Marketing Of The Reading Of The Public Prediction Markets = What Robin Hanson has deep trouble with, and what the prediction exchanges (e.g., InTrade-TradeSports, BetFair-TradeFair) haven’t fully computed yet
• NYT: Dems hope to take US Senate - TradeSports-InTrade probabilities: 18.5%
• We already have prediction markets in future tax rates. It’s called the municipal bond yield curve.

ShareThis

Radiohead’s pick-your-own-price experiment, industry redefining move, publicity stunt for their album “In Rainbows” has had its 15 days or so of fame. Is there anybody out there still caring? Maybe not.

In fact, judging by Inkling’s own Radiohead prediction market, the answer is absolutely No. A few days after announcing their free pilot program smack in the middle of Radiohead’s few days in the media spotlight, the Inkling folks used their own tool to launch a Radiohead issues market:

Recently Radiohead announced there would be no set price for their new album “In Rainbows.” Instead they would let their fans decide what it was worth. When you go to download their album (and it’s only available by download, there are no CD’s) you say what you want to pay. Fans are elated, the music industry is horrified.

We thought it would be fun to set up a marketplace to try and predict what the average price is fans will actually pay. We also ask questions about other performance metrics such as unit sales and industry impact of this new pricing model.

You can get to the new marketplace by going here: http://radiohead.inklingmarkets.com

Fun? Not so much. Scanning through the four markets listed, trading was never substantial and all but dried up after about two weeks. (The static chart above shows two months of prices and activity in the “Will iTunes allow “crowd-defined” pricing like Radiohead is doing in the next year?” market, one of two remaining open markets.)

The Global Warming market set up in the Inkling pilot program by Caveat Bettor suffers from the same affliction, though unlike Radiohead’s short-lived moment in the sun, people still care about global warming. Maybe twice as many traders, a larger number of trades. Still the market is more or less dead – days go by with no noticeable activity. This week’s Top Ten traders all tied with a gain of exactly $0.00.

These public pilot markets do offer some advantages to the exchange manager in that the manager gains more access to trading data than is generally available to market managers in Inkling’s public exchange. The prediction market geek in me says, “Cool!” Of course, no trading = no trading data. Geek says, “Bummer.”

The problem is that this proliferation of little public markets makes very little sense from the trader’s point of view. There is a lot of activity in Inkling’s main public exchange. Almost everyday new markets are created, buying and selling is going on, lots of reason to come back to see what is new. In these little walled off public markets, nobody. Nothing new. No reason to go.

Inkling’s pilot program seems like a good way for organizations to dip their toes into prediction market waters (and therefore probably a pretty good marketing tool for Inkling). A well targeted public market could work, too, but only under rare circumstances: a large and relatively tight knit group with an active and communicative core.

Maybe a college alumni association wants to predict the basketball team’s wins and losses this season? Top predictor at the end of the season wins a prize. This is a good idea.

Radiohead pricing? Zzzzzzzz.

FEED ITEM FOOTER

Midas Oracle .ORG = Site Map + Archives + Best + Charts + Exchanges + Software + Links + Network + LinkedIn + FB + Shared Items + Login + Register + Status + Write A Post Or A Page + How To Publish

• Inkling forums are back.
• The Media Predict startup is smarter than the Inkling-Giberson conglomerate.
• 2 MILLION TRADES LATER: Inkling’s play-money prediction markets are accurate —too.
• The Industry Standard is powered by Consensus Point.
• CNN Political Market officially launches.
• NewsFutures do *NOT* favor event derivative management by traders.
• CNN Political Market has opened clandestinely.

ShareThis

—

In his book, Plight of the Fortune Tellers, Riccardo Rebonato describes how an invitation to bet can be used to separate cheap talk from truly held beliefs (and, in the process, ruin an otherwise engaging dinner conversation).

In the early to mid 1990s in the United Kingdom and in other European countries a widespread fear developed that a variant form of CJD might spread to humans. CJD is a fatal illness—also know as “mad cow disease”—that is well-known to affect bovines. The variant form was thought to have contaminated human beings via the ingestion of beef from cattle affected by the disease. … When the first human cases appeared scientists did not know whether they were observing the tip of an iceberg or whether the relatively few observed cases, tragic as they were, constituted a rather limited and circumscribed occurrence. “Expert scientists” were soon willing to go on record with statements to the effect that “it could not be excluded” that a catastrophe was unfolding. The nonscientific press was all too eager to jump on the bandwagon, and extravagant claims were soon presented, such as that hundreds of thousands, or perhaps even millions, of lives could be lost over the next decade. Specific probabilities were not stated, but the prominence of the reporting only made sense if the possibility of this catastrophic event was nonnegligible: the newspapers, at least judging by the inches of column space devoted to the topic, were not talking about a risk as remote as being hit by a meteorite.

As the months went by … the number of cases did not significantly increase…. Looking at the data available at the time with a statistical eye, I was becoming increasingly convinced that the magnitude of the potential effect was being greatly exaggerated. At just the same time, a well-educated, but nonscientist, friend of mine (a university lecturer) was visiting London and we decided to meet for dinner. As the conversation moved from one topic to another, he expressed a strong belief, formed by reading the nonscientific press, that the spread of CJD would be a major catastrophe for the U.K. population in the next five to ten years. He was convinced, he claimed, that “hundreds of thousands of people” would succumb to the disease. … I challenged him to enter a bet, to be settled in ten years’ time, that the number of occurrences would not be consistent with a major epidemic. My friend refused to take me up on my offer, despite my very attractive odds (attractive, that is, given his stated subjective probabilities). He claimed that “one does not bet on these things”; that he found my proposal distasteful; that, anyhow, he was not a betting man; and so on. I explained that I was not trying to gain material advantage from a possible human disaster, but I was simply probing the strength of his convictions on the matter. Ultimately, the bet was not entered, and the evening was rather spoiled by my proposal.

Julian Simon’s bet with Paul Erhlich is perhaps the most famous example of the use of a bet to test the strength of convictions. Robin Hanson has done a substantial amount of work on the foundations of such “Idea Futures” mechanisms. A similar concept underlies Long Bets and the Simon Exchange.

At Long Bets they say, “Long Bets is about taking personal responsibility for ideas and opinions.” That is the basic idea I had in mine when I suggested that “it would be a real public service to run well-conceived prediction markets based on the grandiose political pronouncements of the ‘chattering classes’.” It is all about an author taking personal responsibility for the opinions he publishes by, in effect via the prediction market, offering to fund countering opinions on well-defined claims if and only if those countering opinions turn out to be true.

(See also Chris Masse’s post. I’m not claiming any originality on my part here, I’m just trying to nudge the idea closer to common practice by suggesting a potentially interesting and fruitful area of application.)

Naomi Klein? Ann Coulter? Pat Buchanan? Michael Moore? Maybe they believe what they write, and would be willing to subsidize a prediction market out of their book royalties to demonstrate the strength of their convictions. Or how about the books from the current crop of U.S. presidential candidates—I wonder if these books contain any claims that are specific and substantive enough to be either true or false.

If such punditry-based prediction markets were common, mistaken-but-honest demagogues (those pundits who actually believe what they write, and are willing to stand behind it) would end up subsidizing more thoughtful analysts participating in the markets; correct honest demagogues would end up taking home larger financial rewards; and dishonest demagogues would dissemble, seek to avoid being pinned down on specific claims, and when pressed for actionable claims they would run and hide.

[Cross posted at Knowledge Problem.]

FEED ITEM FOOTER

Midas Oracle .ORG = Site Map + Archives + Best + Charts + Exchanges + Software + Links + Network + LinkedIn + FB + Shared Items + Login + Register + Status + Write A Post Or A Page + How To Publish

• In a Google search of five keywords or phrases representing the top five news stories of 2007, weblogs will rank higher than the New York Times’ Web site.
• Who would you back, the market consensus or a book-writing pundit?
• “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.”
• Robin Hanson made a career telling people he is “not a joiner”, but where the hell can you spot his true beliefs in Bob’s petitions?
• Robin Hanson’s buddy in the Silicon Valley strikes it rich.
• Quick remarks on Adrien Amzallag’s dissertation: Designing a Terrorism Prediction Market
• Robin Hanson wakes up to the difficulty of blogging.

ShareThis