Previously: Wiser Than The Stock Market —- NOT
Ben Shannon (alias “-Jesse Livermore”-, who blogs at “-Wiser Than The Crowd”-) claims on his blog to have an uncanny ability at forecasting the future and profiting from it, whether it is speculating on InTrade’-s prediction markets or on the US stock market. Here is his stock market call from July 10, 2009:
SELL SELL SELL
The stock market is up about 12% since Ben Shannon’-s “-sell sell sell”- call on July 10th.
Spot the 10th on the chart…- Ben Shannon sold the exact bottom immediately before the rally.
Thanks to Deep Throat for the tip.
Prediction markets produce dynamic, objective probabilistic predictions on the outcomes of future events by aggregating disparate pieces of information that the traders bring when they agree on prices. These event derivative traders feed on the primary indicators —-i.e., the primary sources of information. (Garbage in, garbage out…- Intelligence in, intelligence out…-) Hence, prediction markets are meta forecasting tools.
Each prediction exchange organizes its own set of real-money and/or play-money markets, using either a CDA or a MSR mechanism.
A prediction market is a market for a contract that yields payments based on the outcome of a partially uncertain future event, such as an election. A contract pays $100 only if candidate X wins the election, and $0 otherwise. When the market price of an X contract is $60, the prediction market believes that candidate X has a 60% chance of winning the election. The price of this event derivative can be interpreted as the objective probability of the future outcome (i.e., its most statistically accurate forecast). A 60% probability means that, in a series of events each with a 60% probability, then 60 times out of 100, the favored outcome will occur- and 40 times out of 100, the unfavored outcome will occur.
The value of a set of prediction markets consists in the added accuracy that these prediction markets provide relative to the other forecasting mechanisms, times the value of accuracy in improved decisions, minus the cost of maintaining these prediction markets, relative to the cost of the other forecasting mechanisms. According to Robin Hanson, a highly accurate prediction market has little value if some other forecasting mechanism(s) can provide similar accuracy at a lower cost, or if very few substantial decisions are influenced by accurate forecasts on its topic.