[...] A commercial exchange such as Tradesports, however, is in the business of making money; the fact that it generates useful information is only an incidental benefit. [...]

Yes, but it is becoming more and more an interesting benefit, since the business media and bloggers are generating more and more ink on the predictive power of the prediction markets. In particular, the prediction exchange InTrade has a P.R. strategy that focuses on creating event derivatives that can potentially make headlines (like the long-term Lunar X Prize prediction market) —even though InTrade knows that some of them will be very thinly traded.

Which is good, in my view —as long as the traders (who, indeed, generate profits for the commercial exchanges) keep being satisfied by the high quality of the InTrade platform. (On the other hand, it should be noted that BetFair is a very successful betting exchange that focuses entirely on satisfying its traders. Some could make the case that it is the way to go.)

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Bet on It! – (page two – page three + a crappy listing of exchanges) – by Spectrum’s Steven Cherry

[...] Last year, a poorly worded contract by Tradesports caused a ruckus when some bettors lost money. Trade­sports had set up a market to predict whether North Korea would test a long-range ­missile—which was defined as sending a missile beyond the country’s airspace. Those who bought that contract, which expired on 31 July 2006, thought they had won when a North Korean missile flew 442 kilometers (275 miles) into the Sea of Japan (East Sea). However, the contract also specified that the source of the confirming information had to be the U.S. Department of Defense, which declined to release any specifics about the test. Despite a White House statement that confirmed the missile “went out about 275 miles,” Tradesports awarded the contract to those who bet against a successful test. [...]

More Information:

Event derivative trader “Vancheeswaran”:

[...] Bryan Whitman (Bryan.Whitman@osd.mil) explicitly stated in print, in press conferences, and by email that North Korea fired multiple missiles into the Sea of Japan. For instance, “North Korea fired a long-range Taepodong-2 missile and six short- and medium-range Scud and Nodong missiles. All landed in the Sea of Japan without incident.”

National Security Advisor Stephen Hadley, in a press conference at the White House, stated that the missiles “went out about 275 miles” into the Sea of Japan.
http://www.whitehouse.gov/news/releases/2006/07/20060704-1.html

There are many other examples of the U.S. military and government (not just the press) confirming that the missiles were launched and approximately where they landed. [...]

[...] Chris F. Masse, a [] consultant in Sophia Antipolis, France, who specializes in prediction markets, says that by 2010, “10 percent of Fortune 500 companies will have gone public about their use of internal prediction markets, and probably another 10 percent will be testing some projects.” [...]

As [Robin] Hanson notes, “the winners are attracted by losers, just as wolves are attracted by sheep.” [...]

Go reading the article, if you haven’t done already (and then read Mike Giberson’s comments). — Bet on It! – (page two – page three) — Via Steve Roman

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UPDATE: Robin Hanson comments…

I don’t that much care about terminology here, but I do agree that prediction markets should shine best at the meta level, when competing institutions try to draw what insight they can from other institutions running in parallel.

In August 2004, Todd Proebsting, a researcher in Microsoft’s platform and services division, was approached by a manager in the company’s testing organization who had spent months helping to create a piece of software to be used by other Microsoft programmers. Although it was an internal product, the software still had a rigid development schedule and an official launch date: November 2004, just a few months away. The manager had heard a talk by Proebsting about something called a prediction market, a sort of stock market for ideas, in which Microsoft employees would in effect place bets on predictions, instead of on racehorses or football teams. A lot was riding on the timely completion of the testing software. “You said that a market could be used to predict schedules,” the manager said. “I want to know when my team will finish writing the software.” Proebsting created a market with six possible bets: that the product would ship before November, in November, in December, in January, in February, or later than February. His pool of bettors included members of the development team itself, other developers, and program managers from related teams, as well as internal “customers”—the programmers within Microsoft who would use the software. He showed them all how to use the market, gave them each US $50 with which to wager, and then sat back and watched prices fluctuate. “All six months were started equally at 16 2/3 cents on the dollar,” Proebsting says, meaning that you only had to bet that amount to win $1 if you were right. “Within seconds, the pre-November market went to $0.00 and never moved from there.” So much for beating the deadline. “The November date went down to 1.2 cents in about 3 minutes.” So much for meeting the deadline. “The director of the group came to see me. He asked, ‘What have you done?’?” “No one believes your product will ship on time,” Proebsting told him. The director replied, “No one on the team is telling me this.” After discussing things with his development team, the director came to accept what the market was “saying.” He decided to cut some of the software features that were holding things up. “And the price of the markets started to reflect that—the November price rose,” Proebsting says. “Then the internal customers got wind of the fact that some of their favorite features were being cut and demanded their features back. So the market then reflected that!” In other words, the markets that predicted the software would be very late went back up. “In the end,” Proebsting says, “the product shipped in February, which is what the market predicted.” [...]

Chris F. Masse, a [] consultant in Sophia Antipolis, France, who specializes in prediction markets, says that by 2010, “10 percent of Fortune 500 companies will have gone public about their use of internal prediction markets, and probably another 10 percent will be testing some projects.” [...]

Henry Berg, who runs the Information Markets group within Microsoft, notes that in many cases a company has no formal prediction methods in place. “An organization adopting prediction markets needs to make two major adjustments: deciding to start making formal predictions about the future and choosing to use prediction markets as the mechanism,” Berg says. “In my experience, the first adjustment is greater than the second.” [...]

BetFair, NewsFutures and HSX Research are not cited.

Other than that, it’s a nice article. — Bet on It! – (page two – page three) — Via Steve Roman