Science
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Prediction Market Science
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THIS WEBPAGE IS IN CONSTRUCTION.
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Prediction markets produce dynamic, objective probabilistic predictions on the outcomes of future events by aggregating disparate pieces of information that traders bring when they agree on prices. Prediction markets are meta forecasting tools that feed on the advanced indicators (i.e., the primary sources of information). Garbage in, garbage out… Intelligence in, intelligence out…
A prediction market is a market for a contract that yields payments based on the outcome of a partially uncertain future event, such as an election. A contract pays $100 only if candidate X wins the election, and $0 otherwise. When the market price of an X contract is $60, the prediction market believes that candidate X has a 60% chance of winning the election. The price of this event derivative can be interpreted as the objective probability of the future outcome (i.e., its most statistically accurate forecast). A 60% probability means that, in a series of events each with a 60% probability, then 6 times out of 10, the favored outcome will occur; and 4 times out of 10, the unfavored outcome will occur.
Each prediction exchange organizes its own set of real-money and/or play-money markets, using either a CDA or a MSR mechanism.
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An event derivative is a financial instrument that takes the form of a contract that yields payments based on the outcome of a partially uncertain future event.
A prediction exchange (a.k.a. event derivative exchange, bet exchange, betting exchange) is a central, retail financial exchange where people can trade standardized event derivative contracts.
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DIY prediction markets: A person or organization (who is a user of a DIY prediction exchange, as opposed to an exchange manager) is both the creator of the event derivative and the judge who expires the contract.
X Groups: An X Group encompasses a prediction market and a blog (or group of blogs) that is at the origin of the creation of the event derivative and will cover its existence till expiry.
Reality-based prediction markets: The expiry is based on the outcome of an event in the real world.
Random-based prediction markets: The contract expiry is based on a random outcome decided by a machine (a pure REG or a pseudo REG).
Imagination-based prediction markets: As in the Robin Hanson’s “Murder Mystery Evening”, the contract expiry is based on a random outcome decided by a human being’s imagination.
X Universes: A set of very sophisticated imagination-based or random-based prediction markets, structured around a creator’s universe (e.g., James Bond, Harry Potter, Star Wars, Largo Winch, etc.).
X Games: Random-based prediction markets used for playing traditional games (Poker, Blackjack, Baccarat, Hi-Lo, Omaha Hi, etc.). See the BetFair Games. The X Games are a sub-group of the X Universes.
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- Using Prediction Markets to Track Information Flows: Evidence from Google - (PDF file - PDF file) - (MO excerpts) - by Bo Cowgill, Justin Wolfers, and Eric Zitwewitz - 2008-01-06
- Using Forecasting Markets to Manage Demand Risk - by Intel Corporation’s Jay W. Hopman - 2007-05-16
- Prediction Markets - (PDF file) - by Eric Zitzewitz and Justin Wolfers - 2005
- Complete list of academic papers on prediction markets at CFM
- The Journal of Prediction Markets - (JPM)
- More scientific articles will be listed here, in the near future.
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