Ask The Market – Companies are leading the way in the use of prediction markets. The public sector may soon follow. – (PDF – PR) – by Region Focus’ Vanessa Sumo – 2007-07-20

The power of prediction markets to successfully aggregate and summarize information relies a great deal on giving participants monetary incentives to truthfully reveal their beliefs, in making people “put their money where their mouth is.” This reward entices people to come forward and trade, to toss their bets and information in the ring. The more confident a trader is in his beliefs, the bigger his bet, thus giving more weight to what he knows. Because he will be rewarded for being correct, a trader will have the incentive to constantly watch the markets and to jump on any opportunity when prices fall out of line with their predictions. He will also be motivated to continually seek information to improve upon his bets and therefore the market’s forecasts. [...]

The pharmaceuticals industry has also been keen on prediction markets because choosing a new drug to place its money on can be very risky. “The problem of a pharmaceutical company is that it has many ideas that it could bet on, but it needs to bet on the right one early on, otherwise it could be wasting billions of
dollars on the wrong course,” Servan-Schreiber says. [...]

But no system of forecasting is error free, and so the relevant question is how the errors of this mechanism compare to the errors of other forecasting mechanisms. So far, prediction markets have done at least as well as the alternatives. [...]

Excellent article. Go read it and print it. (It would have been better if she had interviewed Chris Masse. Ha. ha. ha. )

Previous: INTEL BUSINESS CASE: INTERNAL PREDICTION MARKETS DO WORK.

The NewsFutures clients:

The world’s largest steel maker.

CORNING
Display Technologies.

Japan’s largest advertising firm.

Hungary’s leading news weekly.

Voted “most innovative” pharmaceutical company in Fortune‘s 2003 and 2004 rankings.

The US packaged foods giant.

Giant U.S. Pharmaceutical.

Leading provider of objective analysis and effective solutions.

One of the world’s leading providers of outsourcing and IT services.

Europe’s leader in corrugated packaging.

Germany’s global powerhouse in electrical engineering and electronics.

Texas Department of Transportation.

The most complete source for integrated information and technology applications in the global financial services industry.

The Netherlands’ daily newspaper of reference.

Host of the annual Davos meeting of world leaders.

The No. 1 Internet brand globally.

The world’s largest steel maker.

CORNING
Display Technologies.

Japan’s largest advertising firm.

Voted “most innovative” pharmaceutical company in Fortune‘s 2003 and 2004 rankings.

The US packaged foods giant.

Giant U.S. Pharmaceutical.

Leading provider of objective analysis and effective solutions.

One of the world’s leading providers of outsourcing and IT services.

Europe’s leader in corrugated packaging.

Germany’s global powerhouse in electrical engineering and electronics.

Texas Department of Transportation.

The most complete source for integrated information and technology applications in the global financial services industry.

The No. 1 Internet brand globally.

External Links: RAND – Wikipedia on RAND

The achievements of RAND stem from its development of systems analysis. Important contributions are claimed in space systems and the United States’ space program, in computing and in artificial intelligence. RAND researchers developed many of the principles that were used to build the Internet. Numerous analytical techniques were invented at RAND, including dynamic programming, game theory, the Delphi method, linear programming, systems analysis, and exploratory modeling. RAND also pioneered the development and use of wargaming. Current areas of expertise include: child policy, civil and criminal justice, education, environment and energy, health, international policy, labor markets, national security, infrastructure, energy, environment, corporate governance, economic development, intelligence policy, long-range planning, crisis management and disaster preparation, population and regional studies, science and technology, social welfare, terrorism, arts policy, and transportation. RAND designed and conducted one of the largest and most important studies of health insurance. The RAND Health Insurance Experiment, funded by the then-U.S. Department of Health, Education and Welfare, established an insurance corporation to compare demand for health services with their cost to the patient. According to the 2005 annual report, “about one-half of RAND’s research involves national security issues.”

(((A competitor of NewsFutures has for client a very big non-profit organization.)))

In the real world, the reason people use markets is to make money. If an outcome is accurately predicted, it is profitable. In virtual markets, “play money is not a bad predictor, but economists say when real money is at stake, it’s a better indicator,” [Stanford professor Eric] Zitzewitz said. [...]

Abbott declined to discuss how it is using prediction markets, but Zitzewitz said pharmaceutical companies are using prediction tools for sales forecasting and product development. “Suppose you have a bunch of scientists who have some ideas on what chemical compounds might be effective in a new drug,” he said. “But you don’t know how a new drug would fare in clinical trials.” Hence, the company could create a market and pose the possibilities to a swath of people across the organization. “You could run a market on the potential for FDA approval” for instance, Zitzewitz said.

I’d be cautious about prediction markets whose contract expiry is based on the decision made by a small committee (as we have seen with two recent predictive debacles). However, the FDA is a public and science-based group, so I suppose that Eric Zitzewitz’s suggestion is pertinent —I’d like to have other economists’ opinion to be really sure, though. (From Robin Hanson, Justin Wolfers, Paul Tetlock, Koleman Strumpf, etc.)

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Of the nine remaining firms left in the market, Inkling is listed as having second-highest probability of being purchased.

Not knowing anything about that merger and acquisition business, I’d bet on Yahoo! using Inkling Markets in Yootopia and/or Yahoo! buying out Inkling Markets. My suspicion comes from the fact that I spotted Yahoo!’s David Pennock lauding Inkling Markets three times on his blog and elsewhere, while he hasn’t uttered one single word about WSX, which uses the same mechanism design (MSR). Just a wild speculation, here —don’t take this as a serious analysis or insight.

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#2. A close analysis of the Chicago Tribune story strikes another blow to HSX Alex Costakis’ conspiracy theory that says that ABC7 San Francisco should have added a historical perspective to its Inkling Markets story. Indeed, the Chicago Tribune story, too, does not make any reference to any of the other prediction exchanges (betting exchanges) or prediction market consultants. There is a reason for that. Both stories are constructed as a one-shot spotlight on one brand-new Web-based service provider. Although I agree with HSX Alex Costakis that it would be better to have a big picture or historical paragraph somewhere, such mono-brand or mono-company stories are common in the media and blogs —as HSX Alex Costakis would know if he were a bit more litterate in the reporting business. To give one only one instance, when Tech Crunch (the world’s premier blog on IT start-ups) covered Inkling Markets in September 2006, the writer only mentions the Hollywood Stock Exchange as Inkling’s competitor —nowhere in the Tech Crunch story will you spot the names of the Foresight Exchange or NewsFutures, which are the veteran play-money prediction exchanges, let alone the names of TradeSports or BetFair. Such mono-product news article is common in all topics, not only technology, but in business, art, politics, etc.

On the other hand, I agree with HSX Alex Costakis that long dissertations on prediction markets and betting exchanges should be as accurate and complete as possible. But my point is that both the ABC7 San Francisco story and the Chicago Tribune stories did not fall in this category. Thus, HSX Alex Costakis’ dual rant against ABC7 was not pertinent. See: Hollywood Stock Exchange’s Alex Costakis makes historical mistake, TOO. On top of that, it gave the impression that HSX and NewsFutures were frightened to death by a brand-new, innovative competitor. See: Does Inkling CEO Adam Siegel deserve capital punishment, really!?? The publication of this story probably prompted the NewsFutures CEO to drop the link to Midas Oracle from the NewsFutures blogroll. See: Were the NewsFutures real-money prediction markets on Dutch elections accurate? Thank God, a close look at the Google Analytics web stats afterwards showed that this link dropping had the reverse effect that the one intended by our French luminary (EJSS): the number of visitors and pageviews slightly increased. See: Did people follow the NewsFutures CEO’s advice and drop Midas Oracle? It sounds logical, if you think of it. Are you waiting after a Frenchman for advice on which sites or blogs to visit or not to visit? It seems to me that people don’t give the first fig about EJSS’ reading advice. The center of the Universe is Google, not EJSS —I’m so sorry to burst his bubble.

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FOOTNOTES:

a) HSX Alex Costakis is a correct and polite man who understands that I can disagree with him sometimes.

b) The Hollywood Stock Exchange is a great play-money betting exchange and HSX Research is a great software and analysis provider.

c) HSX Alex Costakis is a great prediction exchange executive and prediction market consultant.

d) HSX Alex Costakis’s understanding of the mediablogosphere is abyssal —and his internet marketing skills are inexistent. (((But this last point could also be made about all his competitors. )))

You’ll notice an interesting phenomenon when it comes to early adopters of prediction markets; an inordinate number of pharmaceutical companies are listed. They are the best example of the type of company that needs prediction markets the most: industries where massive research and development costs are spent before any revenue is generated. Pharma’s have a real need to understand which potential drugs and research areas will be successful so they can focus their resources. It’s a similar situation for movie studios, which is why HSX likely has the client list that they do.

Psstt… Jed… Your Snap Preview pop-up windows appearing each time I want to click a link drive me crazy —I want to squash it.

- 3 Reasons Why Snap Preview is Ruining Your Blog, and Hurting Your Readership

Snap’s preview anywhere gizmo is ruining the reading experience for millions of people. [It's] intrusive, obstructive and unuseful in almost every respect and use case. The fact that so many big blogs are using it, big well respected blogs, does not mean that it’s useful, it just means that they, like most bloggers, have all the self restraint of a magpie in a sparkly things factory. [...]