Dixit Peter McCluskey.

John Salvatier,

Our good friend Bo Cowgill might have already re-created those prediction markets on Google’s internal prediction exchange at a marginal cost of zero US dollar. No need for him to “subsidize” external prediction markets.

[As an appendix, I precise that I am in favor of opening the enterprise prediction markets to external traders, for some questions.]

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Subsidizing prediction markets is an old Robin Hanson idea that carries quite a heavy price tag.

Conditional prediction markets is a great idea on the paper. Many people (e.g., Mike Linksvayer) like the idea. However, here is what the uncritical Robin Hanson fanboys blogging on Overcoming Whatever won’t tell you:

• The first problem is that nobody trades those things.

• The second problem is that subsidizing those conditional prediction markets costs an arm and a leg.

• The third problem is that no major news media outlet has ever quoted the prediction market prices / probabilities generated by those conditional prediction markets.

Peter McCluskey could have rent a French mistress (or a French gigolo) for a full year with all the money he is spending on Robin Hanson’s idea. Or vaccinated the whole African continent against Malaria. See Peter’s comment, at the middle of the webpage, here.

Philanthropy and prediction markets are not mixing well —yet.

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Measured Enthusiasm for Prediction Markets - (PDF file) – by Jason Ruspini.

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My thoughts:

1. Peter McCluskey thinks they are “futures”.
2. PAM was only extremely marginally about “terrorism and assassination futures”.
3. Even though they don’t do much more than discounting known information, “prediction markets” is not a misnomer, since the term means that each prediction (in the form of an event derivative contract) is traded on a market.
4. “Decision-aid markets”, not “decision markets” —I’d leave that last denomination for Robin Hanson’s original idea, when the decision applies automatically, after the trading.
5. And what was Justin Wolfers’ reasoning? Might we know? (And why did you swallow it?)
6. Which are the manipulation papers making “unrealistic assumptions”? Names, please.
7. Tax futures are great. But, who else in the world, other than mister Ruspini, believes that they can be fiscal hedging vehicles? (Not doubtful. Just asking. External links, please.)

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Jason Ruspini on the regulation of US event derivative markets:

CFTC-like regulation would save these markets from having to navigate national and state gambling laws, but would come at the cost of flexibility. Some contracts would not be approved for political reasons even if they had demonstrable hedging utility and “economic purpose”.

Intrade is looking for New Market Ideas!

Friday, Jan 25, 2008

What uncertain event are you interested in trading? What uncertain event are you interested in getting predictive information on from the Intrade community? Please let us know by mailing markets@intrade.com.

By suggesting a new market* and agreeing to be cited you will be joining an impressive list of luminaries from Academia, Business, and Government.

Here is just a small sample of those who have previously suggested markets that Intrade has listed?

• Robin Hanson (Prof.)
• International Strategy & Investment Group
• Peter McCluskey
• David Pennock (Dr.)
• Mark Perry (Prof.)
• Koleman Strumpf (Prof.)
• Justin Wolfers (Prof.)
• Eric Zitzewitz (Prof.)

Before we list any new market we [endeavor] to ensure the following:

1. The market will be easily understood and capable of definitive settlement.
2. Market is based on an event that is of significant economic, social, or public interest.
3. Typically be defined as a yes or no (0-100) proposition.

Ensuring your suggestion complies with the above criteria [maximizes] the chance we will list your suggestion for free. In other circumstances we may still list your suggestion for a fee.

*A market that we list and had not previously listed or considered.

They should look in the direction of PopSci PPX for new ideas. [And they should look for a Merriam-Webster dictionary to write the North-American English correctly. I have corrected them two times.]

Yahoo! Research scientist David Pennock’s prediction market proposals for InTrade are great.

And what about a prediction market on whether North Korea will soon launch an intercontinental missile?

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NEXT: I recommend that you read the comments on David Pennock’s post.

More from Peter McCluskey.

And see the comments here.

Economist Michael Giberson will share some thoughts about these markets, later on, no doubt.

Previously: An automated market maker subisdizes Robin Hanson’s presidential decision-aid markets on Intrade

Automated Market Maker for certain Intrade contracts

I have implemented subsidies to encourage trading of some conditional prediction market contracts that may provide useful information about the consequences of the 2008 presidential election, via a simple automated market maker (using an algorithm described near the end of http://hanson.gmu.edu/ifextropy.html). The subsidized market maker ought to provide incentives for traders to devote more thought to these contracts than they would if the liquidity was less predictable.

Intrade has agreed not to charge any trading or expiry fees on these contracts.

Some places to look for extensive description of the motivations behind these subsidies are here and here.

The contracts are:

• DEM.PRES-OIL.FUTURES: Oil Futures and PRESIDENT.DEM2008 prices will move in same direction on Election Day
  This will use the change in the December 2011 Light Sweet Crude Oil futures contract from the close before the election (Monday) to the close after the election (Wednesday). PRESIDENT.DEM2008 refers to the Intrade contract for “Democratic Party Candidate to Win 2008 Presidential Election”.
• DEM.PRES-T.BONDS: Treasury bond interest rate futures and PRESIDENT.DEM2008 prices will move in same direction on Election Day
  This will use the change in the December 2008 30-year US Treasury Bond futures contract from the close before the election (Monday) to the close after the election (Wednesday).
• DEM.PRES-TROOPS.IRAQ: Number of US troops in Iraq on 30 June 2010 if a Democrat is elected president in 2008
• NONDEM.PRES-TROOPS.IRAQ: Number of US troops in Iraq on 30 June 2010 if a non-Democrat is elected president in 2008
  These are scaled claims whose value will range from 0 if the troop levels are zero to 100 if the troop levels are 200,000 (or more).
• DEM.PRES-GOVT.DEBT: Increase in US Government debt if Democrat elected president in 2008
• NONDEM.PRES-GOVT.DEBT: Increase in US Government debt if non-Democrat is elected president in 2008
  Note that the change in debt is usually quite different from what is reported as the budget deficit. The debt numbers will be taken from a source such as the St. Louis Fed Series GFDEBTN, Federal Government Debt
  These are scaled claims whose value will range from 0 if the debt does not increase to 100 if the debt increases by $1 trillion (or more).

Please read the detailed specifications at Intrade before trading them, as one-line descriptions are not sufficient for you to fully understand them.For the first two of those contracts, the market maker will enter bids and asks of 38 contracts, and can lose a maximum of $5187.76 on each contract. For the other four contracts, the market maker will enter bids and asks of 115 contracts, and can lose a maximum of $7906.25 on each contract. The orders may not always show as many contracts as the market maker enters because it doesn’t update orders in response to partial executions. The market maker is designed to maintain a spread of about 2.5 points or less between the bid and ask (unless the price would drop below 0.1 or rise above 99.9, in which case it only maintains an ask or a bid, not both), and it should place new orders within a second or two after one of its orders is completely executed.

Here is a list of the prices at which the market maker might place orders for the 4 contracts where its order size is 115. It will start at a bid of 48.80 and an ask of 51.20. If a bid is completely executed, it will change its orders to a pair of prices one line lower on this list, and if an ask is completely executed it will change its orders to a pair of prices one line higher on this list. For the two contracts where the order size is 38, the spread between the bid and ask will be half the size shown in that list in most cases.

If it appears not to be working this way, please notify me at pcm –at– rahul.net.

Log of trades (updated 4 times a day, times are GMT)

source code (in Python).

Robin Hanson:

Presidential Decision Markets

We have had many prediction markets on who will be elected, but almost none on who should be elected. So far, the only exceptions I know are decision markets on which nominees would most help their party gain the U.S. presidency.

Today, I’m pleased to announce that Peter McCluskey has funded the creation of six now-live InTrade markets that should tell us how a Democratic versus Republican U.S. President will differently effect oil prices, long term interest rates, US government debt, and US troops in Iraq! If enough people trade these assets, then for voters who know which direction they want these parameters to move, InTrade market prices could advise them on how to vote!

Two different approaches will be tried on these four parameters. Two parameters will use a binary shock response futures approach, with one asset each paying based on whether, over the course of election day, oil prices or T-bond interest rates move in the same direction as the probability of a Democrat winner. For example, if you think (speculators think) that a Democrat is more likely to raise oil prices than a non-Democrat, you should be willing to pay more than 50 for the asset that pays 100 if these two move in the same direction. You can cash in these assets a few days after the election.

For the two other parameters, four assets will support simple conditional estimates. Each parameter will have Democrat, Non-Democrat asset pairs. The Democrat asset in the pair pays only if a Democrat is the next president, while the other asset only pays otherwise. Bundling each pair together gives assets whose prices estimate:

• The probability US Govt debt will rise from FY 2010 to 2011 (assets: D, ND).
• The number of US troops in Iraq mid 2010 (assets: D, ND).

Dividing the price of each individual asset by market chances of a Democrat president (or not) produces estimates of these parameters conditional on a Democrat president (or not). The difference between the Democrat and the other conditional estimates say how much of a difference speculators expect a Democrat to make on that parameter. You’ll have to wait up to four years to cash in these assets.

I see four key open questions:

1. Can we get precise enough prices to see a Democrat versus not difference?
2. Can we convince voters that such prices give reliable non-partisan estimates?
3. Can we convince voters these prices show causal effects of the party in power?
4. Can enough voters tell which way they’d like these parameters to move for prices to be useful? (I’m not sure which ways I want.)

Added: Peter has been told InTrade will waive all trading fees in these markets!

Justin Wolfers:

Congratulations Robin and Peter – I think that this is a fantastic innovation, and I look forward to tracking these markets.

Robin Hanson:

More Presidential Decision Markets!

Wow. Under “politics,” next to the “US Pres. Decisions” section I announced Friday, Intrade.com now has an “Impact of next Pres.” section, with markets for conditional estimates of these four parameters:

* eco growth to be at least 2.5% over the next three years,
* unemployment rate to be less than 5% at end of 2011,
* number of violent crimes in 2010 to be less than in 2007, and
* Democrats to control House of Rep’s after 2010 mid-terms,

given each of these five candidates: Clinton, Edwards, McCain, Giuliani, Huckabee, Romney. Cool! I don’t see any orders in these markets yet though, so it is hard to tell how much liquidity they will have.

Added: This is a research initiative of the University of Westminster.

Peter McCluskey (a Robin Hanson fanboy) blogs book reviews. Great blog. Recommended.