BetFairs Mark Davies, the last man standing

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Andrew Black:

Most of the original [BetFair] team have moved on now. Ed Wray is now Chairman, Mark Davies is still there and I’m still on the board and going in from time to time – I have three [BetFair] days this coming week but it’s normally much less than that. The other four members of the foundation team (such as it was) have moved on, but I’m in regular touch with all of them.

Two of them work full time for charities. One isn’t working at all at the moment. John, who had his 40th on Saturday, tried working in a couple of startups after Betfair, but after a fair bit of soul searching he recently decided to become a maths teacher. I had a chat with him about it.

He said that Betfair had been an amazing experience, but it had ruined him for anything else in business. Other ventures had been disappointing by comparison and just weren’t satisfying, so he had moved on to the next stage in life – giving it back.

He was very happy and very positive, just as he was during all the years I worked with him. The early years of Betfair were tough and very stressful, but it was exhilirating and also great fun at times.

UK billionaire Andrew Black (the BetFair co-founder) owns and manages a stable of 30+ Thoroughbred horses, but cant stand anymore to hear about the event derivative traders whom he extracted wealth from.

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The Independent

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PREVIOUSLY: BetFair impose new “-Premium Charges”-…- Do BetFair gag the critics, too?

UPDATE: They announce a Q&amp-A.

BetFair co-founder Andrew “Bert” Black’s blog is flooded (New Orleans-style) with comments from event derivative traders who question the rationality, logic, extent, fairness, true pupose and timing of the new “premium charges”.

PREVIOUSLY: BetFair impose new “Premium Charges”… Do BetFair gag the critics, too?

UPDATE: They announce a Q&A.

Time magazine interview the 2 BetFair-Tradefair co-founders, and not a single time do they pronounce the magic words, prediction markets.

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Betting on a Market

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Edward Wray:

We’-re one of the very, very few Internet betting companies that have never taken a bet out of the U.S., and that’-s because our view has always been it is illegal, which it clearly is now, and so long as it’-s illegal, we’-re not going to do it. That’-s a long-term strategy. Clearly some people made good money out of taking bets out of the U.S. in the short term, [and] have now found themselves in trouble with the authorities. Gambling should be regulated, we’-re very comfortable with that. There are things that need to be safeguarded — how you look after vulnerable people, how you make sure it’-s a clean, above board business, etc. — you don’-t achieve that by prohibiting business. You achieve it by regulating it. The U.S. has tried prohibition once before and it wasn’-t a roaring success. And I think they’-ll find the same thing here. I don’-t know how long it will take, but I’-m more confident than ever that the U.S. market will open up, and when it does, we will be right at the hub of it. It’-s frustrating to us that people in the U.S. can’-t access Betfair. But we go out of our way to make sure they can’-t because the law is the law and we will always respect that.

HISTORY: Prediction Markets Timeline

For an updated version of this document, see the “-paged”- Prediction Markets Timeline.

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CHRONOLOGY &amp- HISTORY: Prediction Markets Timeline

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Feel free to post a comment or contact me, and I’-ll correct or add a factoid. Thanks.

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#1. Historical Prediction Markets

According to Paul Rhode and Koleman Strumpf, prediction markets almost never got it wrong forecasting the 19 presidential elections that took place from 1868 to 1940. (PDF)

#2. The three Iowa Electronic Markets founders (Robert Forsythe, Forrest Nelson and George Neumann)

“-We ran our first market in 1988. We didn’t have regulatory approval at that point so we were restricted solely to the University of Iowa community. We had under 200 traders and under $5,000.”- –- [Robert Forsythe - PDF file]

- [CFTC's no-action letter to the IEM - 1992 - PDF file]

- [CFTC's no-action letter to the IEM - 1993 - PDF file]

#3. Robin Hanson

a) Robin Hanson set up and ran a rudimentary prediction exchange (a market board, PPT file) in January 24, 1989. The outcome to predict was the name of the winner of a Poker party.

b) Until evidence of the contrary, it seems that Robin Hanson was the first to set up and run a corporate prediction exchange —-at Xanadu, Inc., in April 1989. See: A 1990 Corporate Prediction Market + Anonymity is important for employees trading on internal prediction markets.

Robin Hanson: “-I started a market at Xanadu on cold fusion in April 1989. In May 1990, I started a market there on whether their product would be delivered before Deng died.”-

c) Until evidence of the contrary, it seems that Robin Hanson was the first to set up and run a bunch of imagination-based prediction markets. See the Murder Mystery Evening described by Barney Pell —-circa June 8, 1989.

d) Until evidence of the contrary, it seems that Robin Hanson was the first to write a paper on prediction markets created and existing primarily because of the information in their prices (as opposed to markets created primarily for speculation and hedging).

Could Gambling Save Science? –- (Reply to Comments) –- by Robin Hanson –- 1990-07-00
Market-Based Foresight: a Proposal –- by Robin Hanson –- 1990-10-30
Idea Futures: Encouraging an Honest Consensus –- (PDF) –- by Robin Hanson –- 1992-11-00

e) Robin Hanson godfathered the Foresight Exchange (created in 1994) and NewsFutures (created in 2000).

f) Robin Hanson invented the concepts of decision markets (PDF) and decision-aid markets.

g) Robin Hanson invented a new market design (for the 2000-2003′-s Policy Analysis Market), the Market Scoring Rules, a mix between CDA and Scoring Rules —-now in use for most enterprise prediction markets and public, play-money prediction exchanges. Note that MSR is mainly used in a one-dimension version, but many researchers are interested in its combinatorial version.

#4. Other Pioneering Public Prediction Exchanges (Betting Exchanges, Event Derivative Exchanges) and Inventors/Innovators/Entrepreneurs

a) The Foresight Exchange was founded on September 22, 1994 by Ken Kittlitz, Sean Morgan, Mark James, Greg James, David McFadzean and Duane Hewitt. The Foresight Exchange is a play-money prediction exchange (betting exchange) managed by an open group of volunteers. It pioneered user-created and user-managed, play-money prediction markets. Any person can join the Foresight Exchange and interact with the rest of the Web-based organization. An independent judge (independent from the owner of the claim) should be appointed among the volunteers. [Thus, it's not "DYI prediction markets".]

b) The Hollywood Stock Exchange was founded on April 12, 1996, by Max Keiser and Michael Burns. See the patent for the Virtual Specialist. For more info, see: Is HSX the “longest continuously operating prediction market”??? –- REDUX

c) BetFair was founded in 1999 by Andrew Black and Edward Wray, and was launched in England in June 2000. As of today, BetFair is the world’-s biggest prediction exchange (betting exchange, event derivative exchange).

d) NewsFutures was founded in March 2000 and launched in September 2000 in France and in April 2001 in the US by Emile Servan-Shreiber and Maurice Balick. See: NewsFutures Timeline. NewsFutures was the first exchange to let people buy or sell contracts for each side of a binary-outcome event. The advantage of this design is that it avoids the need for “-shorting”-, a notion that tends to confuse novice traders. NewsFutures later extend that approach to deal with n-ary outcome events while implementing automatic arbitrage.

e) TradeSports was launched in Ireland in 2002 by John Delaney. InTrade was later purchased and became a non-sports prediction exchange (betting exchange). As of today, InTrade is the biggest betting exchange on the North-American market —-where betting exchanges are still illegal. As for TradeSports, it closed at the end of 2008, alas.

#5. The Policy Analysis Market Brouhaha

a) Robin Hanson was the main economist behind the 2000–2003 US DoD’-s DARPA’-s IAO’-s FutureMAP–Policy Analysis Market project. (For this project, Robin Hanson invented a new market design, the Market Scoring Rules.) On July 28, 2003, two Democratic US Senators called for the termination of PAM, the the big media gave airtime to their arguments, and the US DOD quickly ended the IAO’-s FutureMAP program.

b) The second branch of the 2000–2003 US DoD’-s DARPA’-s IAO’-s FutureMAP program was handled by the Iowa Electronic Markets and was intended to predict the SARS pandemic. (This project later gave birth to IEM’-s Influenza Prediction Market.)

#6. James Surowiecki’-s The Wisdom Of Crowds

a) James Surowiecki’-s book, The Wisdom Of Crowds, was published in 2004.

b) Impact of The Wisdom Of Crowds.

#7. Recent Public Prediction Exchanges (Betting Exchanges, Event Derivative Exchanges) and Inventors/Innovators/Entrepreneurs

a) US-based and US-regulated HedgeStreet was launched in 2004 by John Nafeh, Russell Andersson, and Ursula Burger. A designated contract market (DCM) and a registered derivatives clearing organization (DCO), HedgeStreet is subject to regulatory oversight by the Commodity Futures Trading Commission (CFTC). In November 2006, IG Group bought HedgeStreet for $6 million.

b) Inkling Markets was launched in March 2006 and co-pioneered (with CrowdIQ, which later bellied up) the concept of DIY, play-money prediction markets.

c) In September 2006, TradeSports-InTrade was the first prediction exchange (betting exchange, event futures exchange) to apply Chris Masse’-s concept of X Groups. See: TradeSports-InTrade prediction markets on Bush approval ratings.

d) HubDub was launched in early 2008 and is the second most popular play-money prediction exchange, behind HSX.

#8. Enterprise Prediction Markets

a) Until evidence of the contrary, it seems that Robin Hanson was the first to set up and run a corporate prediction exchange —-at Xanadu, Inc., in April 1989. See: A 1990 Corporate Prediction Market + Anonymity is important for employees trading on internal prediction markets.

b) In the 1996–-1999 period, HP ran a series of internal prediction markets to forecast the sales of its printers.

c) Eli Lilly sponsored 10 public, industry-level prediction markets in April 2003 (on the NewsFutures prediction exchange).

d) Eli Lilly began using internal prediction markets in February 2004 (powered by NewsFutures).

e) Google‘-s Bo Cowgill published about their use of internal prediction markets in October 2005.

f) Since then, many companies selling software services for enterprise prediction markets have been created.

#9. Disputes Between Traders And Exchanges

a) The scandal of the North Korean Missile prediction market that erupted in July 2006 is, as of today, the biggest scandal that rocked the field of prediction markets.

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Email Interview: Ken Kittlitz

My responses to a set of questions Chris Masse recently emailed to me:

Chris. F. Masse: Ken Kittlitz, you co-founded the Foresight Exchange (it went by the name “-Idea Futures”- at the time) in 1994. Would you mind telling me two words on your co-founders? Which ones brought the most into the project? Are you still in touch with them? Do you know what they have become?

Ken Kittlitz: David McFadzean got the ball rolling by bringing one of Robin Hanson’-s early prediction market papers to our weekly discussion group. Sean Morgan realized that the WWW, then still in its infancy, would be a great way to create such a market. Mark James, along with Sean, did most of the coding of the initial prototype. Duane Hewitt and myself did most of the work on a paper and presentation that our group presented at a conference the following year.

I’-m still in touch only with David- he’-s currently a software architect at QuIC, a company that creates financial risk analysis/mitigation products.

CFM: What was the spirit of your group at that time (in 1994). Did “-entrepreneurship”- mean something for you, guys? Did you envision a commercial venture, or was it just collegians’- play?

KK: Our weekly discussion group was known as the “-BS Group”- (Biological Simulation, in case you’-re wondering), so I’-d have to admit that “-collegians’- play”- is a fair summary. In 1995, we did try to turn it into a commercial venture, which quickly revealed our lack of business experience. We were all techies of one sort or another, and techies often struggle in the business realm.

CFM: Would you mind telling me two words on GMU professor Robin Hanson? How would you introduce him to some of our readers (I pity them) who have never heard of him?

KK: Robin’-s one of the smartest people I’-ve ever met and, unlike many smart people, not over-specialized. He has deep understanding of a number of fields: artificial intelligence, physics, economics and likely a few others I’-m not aware of. He has a habit of coming up with fascinating, controversial ideas, prediction markets being just one example.

CFM: You co-founded this play-money prediction exchange (Foresight Exchange) in 1994. In 1999/2000, Andrew Black and Edward Wray created and launched BetFair in England. BetFair became one of the most successful British start-ups and its two co-founders are now sitting pretty on a small fortune. In hindsight, don’-t you think that you should have moved to the U.K. and incorporated the Foresight Exchange there, using real money?

KK: In hindsight, I think that I should have done a massively-leveraged short sale of NASDAQ stocks in March, 2000. :-)

The best way forward is always hard to identify, even with tools like prediction markets…-

When we tried to commercialize the original “-Idea Futures”-, starting a real-money market offshore was certainly something we considered —- though at that point, somewhere in the Caribbean seemed the likely venue. Even back then, it seemed likely that prediction markets would be considered a form of gambling, and hence subject to draconian restrictions. The Caribbean can be a nice place to live, but the prospect of never being able to return to North America to visit family and friends was quite a disincentive.

CFM: One thing that strikes me when visiting the Foresight Exchange is that you forbid sports prediction markets, which are very popular on the betting exchanges. Even Bo Cowgill’-s group of Googlers trade on sports, sometimes —-I believe. Sports trading can be fun. Are you a jock hater?

KK: Not really, but the Foresight Exchange was created primarily to focus on science and technology claims. Having it cluttered with a couple of dozen “-tonight’-s game”- claims per day wasn’-t too appealing.

CFM: If I can count, you have more than 12 years of experience in the field of prediction markets. You’-ve seen them all, in all colors and shapes. Do you agree with what Robin Hanson said at the Yahoo! Confab, namely that the DARPA’-s PAM scandal ignited interest in corporate prediction markets? Was the PAM scandal a “-tipping point”-?

KK: No. I think the real tipping point was the publication of James Surowiecki’-s “-The Wisdom of Crowds”-. Those of us interested in prediction markets tend to overestimate the PAM controversy’-s importance- it was a big deal for us, but only an incremental step in the general public’-s awareness of the topic. The interest generated by Surowiecki’-s book showed that prediction markets had “-arrived”- —- they weren’-t just of academic interest, but instead had real-world applicability.

CFM: Note that the DARPA’-s PAM prediction markets was to be public. Which leads to my next question. You and partner David Perry at Consensus Point help Fortune-500 companies setting up and running their own internal prediction markets. Have you ever had the case where one firm opened its corporate prediction markets to contractors and clients?

KK: Some of the firms we deal with are certainly interested in having a fairly wide audience, including customers and contractors, for their markets. I can’-t go into specifics at the moment, however.

CFM: How is Consensus Point doing, so far? Can you draw for us the portrait of the firm that wants to use internal prediction markets? Is it always to forecast sales? Do you sense that the requests come from senior executives or from mid-level prediction markets-enthusiast managers?

KK: Consensus Point is doing very well so far. A lot of inquiries do indeed originate from mid-level managers and researchers, but a fair number also come from the executive level. Sales forecasting is a popular application of the market, but project completion times and commodity price forecasting have also proved to be frequent questions.

CFM: Sorry to ask you this question bluntly. Would TradeSports and Betfair make great competitors of Consensus Point if ever they decided one day to sell prediction market services to organizations?

KK: Quite possibly, but it’-s certainly not a given. Both companies have great trading platforms, but their expertise is in running real-money, public markets. Corporations aren’-t really looking for that sort of domain knowledge when considering how to implement and use a prediction market.

CFM: Would you mind describing in a few words the prediction market services you sell? I guess it’-s web-hosted CDA, but are some firms interested in web-hosted MSR?

KK: We offer both hosted and on-site installations of our software, as well as training, analysis and consulting services. As for MSR versus CDA, see below.

CFM: Speaking of Market Scoring Rules, why did you decide to use this design as the engine for the Washington Stock Exchange? What is its main competitive advantage to CDA? How can MSR best be described: “-betting”- or “-simplified trading”-?

KK: The line between an MSR and a CDA is thinner than you might think! We have a market maker for each stock that provides liquidity by placing bid and ask orders- this is a convenient way of implementing an MSR within a CDA framework. An MSR really helps to start (and keep) the market going, because people always have a price they can buy or sell at. With an unadorned CDA, the bid/ask spread can be enormous, and trading volumes very thin. This alas, is often the case on the Foresight Exchange.

I’-d describe an MSR as allowing for “-simplified trading”- rather than “-betting”-, though I suppose it depends on how much thought the person interacting with it puts in!

CFM: Just curious. When a prediction exchange decides to use MSR, does it have to pay fees or royalties to its inventor, Robin Hanson?

KK: I don’-t believe so, but Robin is in a far better position to answer that question than I am…-

CFM: What is the biggest mistake (if any) you have made since the grand opening of Consensus Point? What did you learn from this big mistake?

KK: No really big mistakes come to mind. Of course, such things are often only obvious in retrospect, so ask me again in a few years.

CFM: What are corporate prediction markets competing against (if any)? Internal polls? Groups of in-house experts? The firm’-s executives? Something else?

KK: Generally, the firm’-s executives. We haven’-t encountered too many cases where firms have been trying to use internal polls as part of their forecasting efforts.

CFM: Are you positive that corporate prediction markets will show something for it? Will the economics literature soon be filled with business cases on how firms can clearly benefit from using internal prediction markets?

KK: Based on my experiences in the field thus far, I’-m confident that prediction markets will prove to compare favorably with the other forecasting methods companies use. This isn’-t to say that they’-ll always yield good information, or be the best thing to use in all situations, but I think they will turn out to be valuable.

Am I positive of this? Not absolutely. But then, I try not to be absolutely positive of anything!

CFM: Now, the question that kills. Tell me frankly. Are corporate prediction markets a “-fad”- or are they just started?

KK: Great question! I think it largely depends on how the prediction market community presents the ideas. There’-s a very real danger that the topic will be over-hyped and, consequently, ultimately dismissed, just as so many other trendy business ideas have been in the past. Today’-s darling is often tomorrow’-s pariah. That would be a shame, since (obviously) I think the markets have a lot of merit.

Note by “-prediction market community”-, I’-m referring not only to those who create and sell prediction markets and associated services, but also people who blog about the topic, create vortals, etc. Not mentioning any names here --) .

CFM: Are prediction markets just one forecasting tool, or do they have a bigger function, in your view?

KK: The pragmatist in me says they’-re just one tool, albeit a great one. The idealist finds something profoundly appealing in their ability to democratize how information is gathered and, ultimately, how decisions are made. The idealist thinks they’-re something more.