Obstacles to Prediction Market Adoption

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Harrah&#8217-s is setting up a pilot prediction market to forecast customer activity in one of its domestic casino operations. […]

Since the power of prediction markets hinges on effectively tapping into cognitive diversity throughout an organization, Page also argues convincingly that if members of a group do not have enough diversity in their perspectives, prediction markets can actually produce dismal results. […]

Until now, few of the companies sponsoring successful pilots or tests have deployed prediction markets on a broad or sustained basis. Why not? One explanation is that prediction markets are deeply subversive. After all, lots of midlevel executives are consumed with the task of forecasting. If prediction markets do a better job of it, doesn&#8217-t that discredit the efforts (and perhaps even the motives) of these executives? But as prediction markets shift their focus toward new knowledge creation, they may become less threatening within corporations. […]

I don&#8217-t buy this explanation &#8212-nor do I buy that other one.

My view is that we haven&#8217-t yet demonstrated clearly when and how prediction markets can be useful.

Are prediction markets useful?

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According to Alan Abramowitz, John Tierney has been &#8220-greatly exaggerating the accuracy of the betting markets.&#8221- &#8220-They follow the polls. That’s it.&#8221-

My comment to Alan Abramowitz and John Tierney:

&#8220-They follow the polls. That’s it.&#8221-

Yes, they follow the polls. No, that&#8217-s not it.

Traders also dig the news of the day and make anticipations about the outcome. For instance, towards the end of the 2008 Democratic primary, the polls and the mass media were still giving Hillary Clinton a very good standing, whereas the prediction markets (informed by a bunch of political experts who did the counting of the delegates and super-delegates) were telling us that she was as toasted as Lehman Brothers in the middle of the credit crunch crisis.

Are prediction markets useful? If John Tierney wants to answer this question, he should pick up a prediction market and put it in the social context of that day. Some prediction markets are more useful than others. In the case of the 2008 Democratic primary (a complicated matter), the prediction markets sided with the best informed political experts against the mass media and the polls. So to speak, they were an umpire. In that case, we see the emergence of a social utility. We now have the case for the media citing more the probabilities of the liquid (play-money and/or real-money) prediction markets.

Previously: #1 – #2 – #3 – #4 – #5

External Link: Club of Growth

My open challenge to AskMarkets co-founder George Tziralis

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Dear George,

Congrats for the launch of AskMarkets. Best wishes to your prediction exchange and consulting firm.

Here&#8217-s the perfect opportunity to ask you the &#8220-question that kills&#8221-:

What was the social utility of the political election prediction markets during the 2008 campaign?

In other words, why should the media have informed people about the InTrade probabilities at a time Nate Silver did a near-perfect job forecasting the 2008 US elections?

What&#8217-s the added value of the political election prediction markets over the poll aggregators?

Can you cite one prediction market (other than the &#8220-who&#8217-s gonna become president?&#8221- prediction market) that has a high social utility?

Each time I ask this question to one of the prediction market luminaries (or so they think they are), I get back the same glance I would get from a dead trout &#8212-so I would appreciate if you could attempt to answer my question by publishing a blog post on Midas Oracle.

Best regards,

Chris Masse, bombastic blogger


It wasnt about the predictions.

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Let&#8217-s not confuse media visibility with utility. Aside from the depressed Obama-to-win prices on one exchange, prediction market and polling aggregation results for the 2008 election were essentially the same using squared errors. Despite his insane schematics, Emile Servan-Schreiber has a good point about capturing the interest of the public, something that nerdy academic and libertarian-types aren&#8217-t necessarily good at. An Obama-backing baseball statistician out of Daily Kos nailed that part this year, a year where people were especially skeptical of markets, not to mention unregulated &#8220-offshore&#8221- ones. Likewise, if you put down the lens of considering markets as commission generators, you&#8217-ll see the value of contracts tied to social and cultural outcomes. Of one the biggest assets of prediction exchanges is media goodwill, which should be fostered by distilling information on subjects like global development and art prices.

Other things to keep in mind:

  • This year happened to have a lot of favorite-longshot States, which turned-out to be favorable to 538&#8217-s error relative to markets.
  • Prediction markets register information in real time. Since the difference in error is small, this is important.
  • Markets are more flexible, and useful in situations where you don&#8217-t have a rich data set and obvious statistical analyses. Elections are just one type of question. Even if you have data, it might be less expensive to set up a new contract than to undertake the analysis.
  • And of course, prediction markets have functions aside from forecasting, and provide incentives for uncovering new information.

The fact that Emile Servan-Schreiber (usually, a smart man) treats the 2008 US presidential elections, as seen thru the lens of the NewsFutures prediction markets, so lightly, making it a race of spermatozoids swimming their way to the Oval Room, shows you that the prediction market luminaries are i

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Download this post to see the NewsFutures widget below.

My open challenge to InTrade CEO John Delaney

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InTrade CEO John Delaney:

Our #1 untapped resource is the vast collective intellect that we have only started to use. Harnessing the &#8220-wisdom of the crowd&#8221- has a very big potential role in improving all of our lives. If we do it, we all have a voice and will feel part of the solution as well as the problem. We can solve some wicked problems, like climate, resource, growth, social, and economic challenges. In simple terms, there exists between us the best information on how we solve our key challenges. If our leader’s embrace and permission new systems like prediction markets to operate in a transparent prudent way I am convinced that we can contribute in no small part to the solution.

Recall, that US Department of Defence believed a prediction market could provide valuable information on growth, risks and social issues. Hundreds of academics, dozens of Fortune 500 companies, and millions of people believe that prediction markets can help provide valuable information on economic, financial, social and environmental issues.

I have already expressed my deep skepticism for this kind of grandiose discourse.

Today, if I may, I would like to ask these questions to John Delaney:

  1. We have just experienced one &#8220-wicked&#8221- problem, recently &#8212-the credit crunch crisis. Can you demonstrate that InTrade was &#8220-part of the solution&#8221-?
  2. Speaking of the credit crisis, for instance, what makes you think that InTrade can be &#8220-part of the solution&#8221-, whereas it is now documented that the World Economic Forum (a.k.a. Davos), where 2,500 &#8220-global leaders&#8221- gather each year, have failed miserably in raising interest for the speakers who were talking about this (then, looming) financial crisis? Is InTrade really stronger than Davos?
  3. Would you mind giving us specific instances, taken from the past 12 months, where the InTrade prediction markets were of high social utility to society?
  4. Can you cite the names of some research scientists who are endorsing the idea that the real-money prediction markets (from either InTrade or BetFair) &#8220-can contribute in no small part to&#8221- the solutions to the world&#8217-s &#8220-wicked problems&#8221-?
  5. What would you respond to those who say that, during the 2008 US presidential election campaign, the InTrade prediction markets sucked up to Nate Silver?

Here are my thoughts:

  1. I agree with InTrade CEO John Delaney that prediction markets are interesting, but I disagree when he suggests that they are radical tools &#8212-they are subtitle tools, actually.
  2. I agree with InTrade CEO John Delaney that prediction markets are (somewhat, I would say) useful to society &#8212-but the demonstration should be done using Robin Hanson&#8217-s guidance.


What Nate Silver predicted:

What InTrade predicted:

Political prediction markets should move beyond mere horse-race forecasts to demonstrate larger social value.

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I agree with that.

The key, now, is to go beyond the accuracy issue and to move on to the utility issue.

It&#8217-s a much complex problematic, which those who have been over-selling the prediction markets are unwilling to undertake. [*]

Maybe a small bunch of prediction market people, maybe assembled in a new prediction market structure, might go for that lofty goal of fingering the specific instances where prediction markets create real social utility.

[*] Yelling across the harbor, like an illuminated Jesus Christ, that prediction markets can help &#8220-avoiding future [financial] crisis&#8221- is a sign that some prediction market practitioners have lost their intellectual compass. To my knowledge, InTrade hadn&#8217-t had any prediction market focused on the &#8220-looming credit crunch crisis&#8221-, last summer. Its CEO should be careful about making any grand statement. As I wrote many times, at best, the prediction markets are the best umpire you can have between either the mass media and the politicians, on one hand, and a group consisting of the best experts, on the other hand. An umpire is only useful during critical times, in a game. But, other than that, most of the times, the umpire is not the determinant of the game &#8212-the players are.

The researchers and practitioners should make a solid case for each of these critical instances where the prediction markets have a real social utility.

Stop the over-selling. Let&#8217-s start the real work.

Nobel laureate Gary Becker and judge Richard Posner both wish that, one day, real-money prediction markets will be legal, without restrictions, in the United States of America.

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Via David Pennock of Odd Head fame

Gary Becker:

[…] I believe that online political prediction markets, and other online prediction markets as well, should be legal in the United States and elsewhere, even if the amounts bet were quite large. There is no important substantive difference between such online betting markets and the Chicago Mercantile Exchange and other exchanges that allow individuals and organizations to take positions on movements of stock indexes, housing price indexes, and prices of other derivatives. A distinction is sometimes made between political betting markets and derivative markets since participants in derivative markets may be hedging other risks that they face. Yet this distinction has little substance since if larger bets were allowed in online political markets, groups whose welfare depended greatly on political outcomes would make greater use of these markets. For example, if a Republican presidential win would mean greater spending on military weapons, companies in the arms business might hedge their risks by betting on Barack Obama.

If large bets were allowed, some wealthy groups may bet a lot on their candidates in order to exert bandwagon influences on public opinion through their large bets affecting market odds. If so, these markets likely would become less reliable as predictors of outcomes, and hence would have less influence on opinions. To a large extent, therefore, these markets would be self correcting, although online political markets might place various other restrictions on bets, as is common in derivative and other exchanges.

Richard Posner:

[…] There is an interesting question whether prediction markets should be thought of as &#8220-gambling” and perhaps prohibited. As a matter of policy, that would be a mistake, even if one thinks that gambling should be prohibited. The prediction markets are markets for speculation, rather than for game-playing or risk-taking. Slot machines, card-playing, roulette wheels, and other conventional forms of gambling do not generate socially valuable information. Speculation does. Commercial speculation serves to hedge commercial risks and bring prices into closer phase with value. Political, cultural, etc. prediction markets also yield socially valuable information. The outcome of elections is important to companies and even individuals for whom particular public policies are important- they may wish to make adjustments to avert or exploit looming political change. Politicians too need to have as sharp a sense as possible about the effects on the electorate of their and their opponents&#8217- strategies. Apparently they can get more accurate information from the prediction markets than from the public opinion pollsters.