The right way to implement a multi-outcome prediction market: Linear programming

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Over on Oddhead Blog, I give a lengthy pitch for linear programming as the &#8220-right&#8221- way to implement a multi-outcome prediction market.

I argue that the simplest and most common approach &#8212- to treat a multi-outcome market as a bunch of independent single-outcome markets &#8212- is wrong, even though it&#8217-s the approach taken by most prediction markets, bookmakers, and financial exchanges.

I also argue that

  • IEM&#8217-s implementation is one of the worst
  • Intrade&#8217-s is slightly better but not much
  • Newsfutures&#8217-s and Chris Hibbert&#8217-s phantom bids approach is even better
  • A host of people* hit on the best approach, many well before I did, advocating linear programming as a natural matching engine for multi-outcome markets
&nbsp- *Including Baron, Bossaerts, Chen, Economides, Fine, Fortnow, Kilian, Lange, Ledyard, Nikolova, Pennock, Peters, So, Wellman, and Ye.

DELEGATES AND SUPERDELEGATES ACCOUNTANCY

= like sausages

You don&#8217-t really know what&#8217-s inside.

The Numbers Guy

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Read the previous blog posts by Chris. F. Masse:

  • Barack Obama is the 44th US president.
  • We already have prediction markets in future tax rates. It’s called the municipal bond yield curve.
  • O’Reilly – Money-Tech Conference
  • Google Profiles
  • Event Derivative Exchange HedgeStreet is baaaaaaaaack… from the grave.
  • Sports Derivative Forum
  • AMERICA’S CULTURAL HERITAGE AND ETHICAL VALUES ARE BEING POLLUTED AND DILUTED BY ILLEGAL IMMIGRATION.

The InTrade webmaster is a moron.

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Read the previous blog posts by Chris. F. Masse:

  • WordPress founder Matt Mullenweg is my hero and so he should be yours.
  • InTrade-TradeSports has seen more than $50 million wagered on the U.S. presidential election.
  • Prediction markets on who is going to win an election are more accurate then the final Gallup poll.
  • LinkedIn will be data-mining its database of millions of users to find potential experts.
  • Britons can’t get enough of Yankee’s politics.
  • TURNING POINT: BARACK OBAMA EVENT DERIVATIVE NOW AHEAD FOR BOTH DEMOCRATIC NOMINATION AND NOVEMBER’S ELECTION.
  • Five reasons Hillary Clinton should be worried

Intrade beats Zogby on Super Tuesday

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Both the prediction market and the pollster called 5 of the 7 head-to-head contest winners, so it was mostly ties between them. But in the NJ Democratic primary and the California Republican primary, Intrade contracts pointed to the winner on election eve, while Zogby indicated a tie in NJ and Romney in California.

Standings &nbsp- &nbsp- &nbsp- &nbsp-
Wins Losses Ties Pct Contender Avg Eve Prob
&nbsp- &nbsp- &nbsp- &nbsp- &nbsp- &nbsp-
5 2 9 59.4% Intrade 69.6%
2 5 9 40.6% Zogby 39.2%

Contest-by-contest breakdown at Caveat Bettor.

I was disappointed that Zogby only presented polling on 7 of the 20 contests on Super Tuesday.

Oprah Winfrey

Oprah Winfrey

by Daniel Edwards

Read the previous blog posts by Chris. F. Masse:

  • Gary Flake to David Pennock: Come on board… or die.
  • Technology Futurism
  • Trade on BetFair-TradeFair as you would trade on TradeSports-InTrade, thanks to order-entry software BinarySoft.
  • Pervez Musharraf prediction markets –Eric Zitzewitz Edition
  • The Over-Round Explained
  • WHY THE PREDICTION MARKETS WILL LIKELY F**K UP SUPER TUESDAY 2008.
  • Still unconvinced by prediction market journalist Justin Wolfers

Papers on Prediction Markets

Preparing a Negotiated R&amp-D Portfolio with a Prediction Market – by Cedric Gaspoz and Yves Pigneur
http://www.hec.unil.ch/cgaspoz/files/pub/Gaspoz08a_Preparing_a_Negotiated_R_D_Portfolio_with_a_Prediction_Market.pdf

Multi-Criteria Decision-Making versus Prediction Markets – by Cedric Gaspoz and Yves Pigneur
http://www.hec.unil.ch/cgaspoz/files/pub/Gaspoz07c_Technology_Foresight_for_IT_Investment.pdf

Read the previous blog posts by Chris. F. Masse:

  • Gary Flake to David Pennock: Come on board… or die.
  • Technology Futurism
  • Trade on BetFair-TradeFair as you would trade on TradeSports-InTrade, thanks to order-entry software BinarySoft.
  • Pervez Musharraf prediction markets –Eric Zitzewitz Edition
  • The Over-Round Explained
  • WHY THE PREDICTION MARKETS WILL LIKELY F**K UP SUPER TUESDAY 2008.
  • Still unconvinced by prediction market journalist Justin Wolfers

The 45-degree Line

Via Steve Roman, Michael Abramowicz.

Read the previous blog posts by Chris. F. Masse:

  • BetFair SP = BetFair Starting Price
  • Gary Flake to David Pennock: Come on board… or die.
  • Technology Futurism
  • Trade on BetFair-TradeFair as you would trade on TradeSports-InTrade, thanks to order-entry software BinarySoft.
  • Pervez Musharraf prediction markets –Eric Zitzewitz Edition
  • The Over-Round Explained
  • WHY THE PREDICTION MARKETS WILL LIKELY F**K UP SUPER TUESDAY 2008.

We regret to inform you of the passing of BettingMarket.com.

No GravatarNiall O’Connor

Read the previous blog posts by Chris F. Masse:

  • Bzzzzzzzzz…
  • Bzzzzzzzzz…
  • “No offense, but I think Radley Balko is the most valuable blogger in America right now.”
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