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Idea Pageants are no Prediction Markets.

Chris F. Masse — Wed, 25 Nov 2009 07:34:35 +0000

Paul, don’t talk about “shares”. The right vocabulary is “event derivatives” — or, in other contexts, “event derivative markets” and “prediction markets”.

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Prediction markets VERSUS Prediction markets on prediction markets VERSUS Conditional prediction markets

Chris F. Masse — Wed, 02 Sep 2009 15:31:50 +0000

Panos Ipeirotis:

[...] 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.

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.

Financial gaming explained in 50 seconds

Chris F. Masse — Wed, 19 Aug 2009 14:47:58 +0000

TradeSmarter

Download this post to see the embedded video —in case your feed reader doesn’t show it to you.

How BetFair Works = How BetFair lies about the history of the betting exchange industry

Chris F. Masse — Wed, 12 Aug 2009 15:58:51 +0000

How BetFair Works — VIDEO

This BetFair video totally misinforms the public about the history of the betting exchange industry. It actually started in the United States of America, with the Iowa Electronic Markets in 1988, the ForeSight Exchange in 1994, and the Hollywood Stock Exchange in 1996.

Don’t shoot the speculators. They predict prices, not set them.

Chris F. Masse — Mon, 13 Jul 2009 07:02:49 +0000

L. Gordon Crovitz in the Wall Street Journal:

More-detailed reporting on who has which kinds of positions in oil would make the market more understandable. It would show that so-called financial speculators are trying to predict price movements, but also trying to hedge risk. Likewise, commercial traders that take delivery of oil are hedging risks, while also predicting future prices. As oil expert Daniel Yergin points out, more visibility “will give a better sense of how much is the market responding to supply and demand in physical oil and how much is it responding to the supply and demand of money on the part of investors.”

It doesn’t make sense to shoot either kind of messenger. Markets are collections of information, translated through trading into prices. These prices, unless there is manipulation, are the best estimate of future supply and demand. Such price discovery should not be controversial, though it too often has been.

Can prediction markets help improve economic forecasts?

Michael Giberson — Mon, 15 Jun 2009 16:40:57 +0000

At VOX, David Hendry and James Reade examine the question, “How should we make economic forecasts?” Among the ideas discussed is whether prediction markets could be used to improve economic forecasting. Interesting suggestion and seeming to be worthy of additional exploration, but the authors don’t go too deep here. Instead, they assert that “prediction markets can be viewed as a form of … model averaging,” and then drift into a discussion of forecast averaging. I’m not sure that forecast averaging is a good way to look at prediction markets.

Here is what they say:

Prediction markets can be viewed as a form of forecast pooling or model averaging, a common forecast technique (Bates and Granger 1969, Hoeting et al 1999 and Stock and Watson 2004). That is, forecasts from different models are combined to produce a single forecast. In prediction markets, each market participant makes a forecast based on his or her own forecasting model, and the market price is some function of each of these individual forecasts.

Since the “prediction” implied by a prediction market is set by the marginal transaction, it depends not at all on the distribution of earlier trades, nor on the valuations of parties priced out of the market at the current price.

For example, consider two event markets: in the first 999 contracts trade at $0.50 and the 1000th and final trade is at $0.75; in the second 999 contracts trade at $0.76 and the 1000th and final trade is at $0.75. In the typical interpretation of prediction markets, the event is “predicted” to result with a 75 percent probability in both cases. However, averaging among the different predictions doesn’t get you that result.

(Well, strictly speaking the market price is “some function” of the prices – namely, one in which all trades but the last are weighted zero and the last trade is weighted one. You can call this “averaging,” but that isn’t the most useful explanation of the function.)

I’m not arguing that forecast averaging might not be a good idea in many situations, just that averaging doesn’t seem like a good way to explain what a prediction market is doing.

At the contrary, let’s call them prediction markets.

Chris F. Masse — Mon, 15 Jun 2009 13:12:12 +0000

Panos Ipeirotis:

[...] Now, do we need to call them *prediction* markets? I would agree that there is no real reason for that… All markets have information aggregation characteristics and sometimes it is annoying to see how much we reinvent the wheel when studying “prediction” markets, pretending that they are fundamentally new beasts. (The “we” includes myself.)

If we called them simply markets, I think we would have made significantly faster progress…

A prediction market is a market where a prediction is floated —people can buy or sell that prediction. Contrary to the traditional derivative markets, prediction markets are simplified to be usable by small people. Let’s keep this keyword.

Prediction Markets = Betting Markets = Event Derivative Markets

Chris F. Masse — Fri, 12 Jun 2009 14:45:22 +0000

Prediction Markets = Betting Markets = Event Derivative Markets

They don’t agree, but I don’t care. I am right, and they are wrong.

The Accuracy Of Prediction Markets

Chris F. Masse — Fri, 12 Jun 2009 06:14:41 +0000

- A Lesson in Prediction Markets from the Game of Craps – by Paul Hewitt

- Why Public Prediction Markets Fail – by Paul Hewitt

Both articles are required reading for Jed Christiansen and Panos Ipeirotis (alias “Prof Panos”).

Patrick Young (InTrade’s fifth Beatle) still can’t figure out the industry he helped created.

Chris F. Masse — Sat, 06 Jun 2009 15:40:08 +0000

Well, we’re here to help out the lost souls.

Patrick Young:

Director and Founder: Intrade

Privately Held; 11-50 employees; Capital Markets industry

September 1999 – February 2002 (2 years 6 months)

I was one of the founders and a director of the company Intrade which set up one of the first sports exchanges in Europe.

Nowadays there is a vogue for calling these businesses prediction markets…which presumably mans there must be markets that don’t predict events and trade on past [occurrence]?

No, it means that prediction markets are optimized for simplicity and usability —as opposed to the other derivative markets, which are quite complicated and inaccessible to the mainstream people.