Prediction Markets 101

Chris F. Masse — Sat, 12 Jan 2008 10:28:28 +0000

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 advanced indicators (like polls and surveys). 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 60 times out of 100, the favored outcome will occur; and 40 times out of 100, 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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Any comment, Michael Giberson?

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Credits given to:

- Chris Masse;.

- Robin Hanson.

- Jonathan Kennedy.

- Steve Roman,

- The Everyday Economist.

- Adam Siegel.

- George Tziralis.

- Leighton Vaughan-Williams.

- Emile Servan-Schreiber.

- “Thrutch“.

- Panos Ipeirotis.

Prediction Market Industry Association = useless, so far

Chris F. Masse — Thu, 10 Jan 2008 08:39:13 +0000

We have witnessed a backlash against the prediction markets just after the Hew Hampshire fiasco. Some bloggers and journalists picked on the prediction markets (InTrade, that is), even though both the polls and the pundits were awfully wrong too. [*] Here are the persons who participated in the pro-PM side of the debate:- Robin Hanson at Overcoming Bias (the best pro-PM piece so far, although his phrasing is a bit too long and a bit too complicated for the average citizen);

- Justin Wolfers in the Wall Street Journal (who did not convince Felix Salmon, who in tun did not convince me );

- Chris Masse at Midas Oracle (see Tim Harford’s new post to discover how irrational Chris Masse really is );

- Jason Ruspini in a comment here;

- Caveat Bettor on Caveat Bettor;

- and John Tierney in the New York Times (a special case I’ll blog about soon).

[UPDATE: Jonathan Kennedy.]

[UPDATE: Mike Giberson.]

[UPDATE: Eric Zitzewitz.]

[UPDATE: Cass Sunstein.]

[UPDATE: Steve Roman,]

[UPDATE: Nigel Eccles.]

[UPDATE: The Everyday Economist.]

[UPDATE: Adam Siegel of Inkling Markets.]

[UPDATE: George Tziralis.]

[UPDATE: Leighton Vaughan-Williams.]

[UPDATE: Emile Servan-Schreiber of NewsFutures.]

[UPDATE: "Thrutch".]

[UPDATE: Panos Ipeirotis.]

[UPDATE: Sean Park.]

[UPDATE: Lance Fortnow.]

[UPDATE: Jed Christiansen.]

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[*] For why the polls were wrong, see: The New York Times, Zogby, Rasmussen, Gallup… [Thanks to Emile Servan-Schreiber of NewsFutures for one link.]

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Prediction Markets 101

Prediction Market Industry Association = useless, so far