http://www.chicagotribune.com/business/yourmoney/chi-0704160447apr17,0,2547860.column?coll=chi-business-hed

Prof, you were 100% wrong.

Prediction markets on which country will host the Olympics have never worked.

- BetFair’s event derivative prices (on the far right of the chart, you can see that the price went down to zero):

- InTrade’s event derivative prices (on the far right of the chart, you can see that the price went down to zero):

- HubDub’s event derivative prices:

Who will recieve the winning bid to host the 2016 Olympics?

- Here’s what happened to the Paris 2012 event derivative:

[...] Prediction markets are gaining interest because the Internet allows greater worldwide access to them, as well as to the ever-increasing amount of data stored on any topic imaginable (which theoretically allows participants to make more informed predictions, individually and in aggregate). These factors, plus the enormous amount of computing power that will make it possible to instantly calculate exponentially small odds, are stimulating new research on advanced computational models in prediction markets. These models could be capable of analyzing entire events such as the annual NCAA collegiate basketball tournament, which begins a 63-game schedule with 2⁶³ possible outcomes by the tournament’s end. [...]

Growing opportunities in internal private-sector prediction markets are also revealing divergent philosophies among the markets’ designers. Many of the public markets feature price-adjustment algorithms built around answering discrete multiple-choice outcomes, such as which candidate will win an election or if a product will launch in month x, y, or z. [...]

IEM steering committee member Thomas Rietz, a professor of finance at the university, says the aggregate zero-risk design of the IEM allows the markets to perfectly reflect the aggregate forecast opinions of its participants. By aggregate zero-risk, Rietz explains that when a trader enters a particular bilateral (either/or) market, he or she must buy one share of each choice, called a bundle, for a total cost of $1. If the trader holds the bundle until the market concludes, there is neither profit nor gain. If the trader guesses the outcome successfully, and sells the losing unit of the bundle to another trader while the market is running, he or she picks up the original $1 bet plus whatever price was agreed upon for the losing share that was sold. If the trader chooses to hold onto the loser and sell the eventual winner, however, they will incur the $1 loss at payout time. At any given time, the number of eventual winning shares and losing shares is equal and held by the traders. So, the university bears no counterparty risk and there is no need to provide hedging margins that irrationally affect outcomes. “The price you would be willing to buy or sell for today is your expectation of its value in the future—the prices can be directly interpreted as a forecast,” Rietz says. “In ordinary futures markets, there is a long-lasting debate, going back to John Maynard Keynes in the 1930s, over whether prices can legitimately be used as forecasts, and it all hinges on whether or not people demand a return or face a risk in aggregate when they’re investing in these contracts.” [...]

One enduring research problem on combinatorial markets is mitigating the effects a virtually unlimited spectrum of outcomes will have on creating markets that are so thin in trades they do not serve their purpose of aggregating information. In such markets, which might bear a resemblance to an enterprise prediction market in that there are not enough participants to provide a statistically valid spread of opinion, Pennock says a market-maker algorithm might serve as a price setter within widely acceptable limits. “I believe that approximation algorithms will be fine for the market maker, because people don’t really care about making bets on things that are incredibly unlikely, like 10−6 chance,” Pennock says. “But as long as you’re betting on something with a 10% chance of happening, we’ll be able to approximate pretty quickly with a market-maker price.” [...]

David Pennock’s website and blog

- InTrade CEO John Delaney is 15 minutes in.

- Tom Rietz of Iowa Electronic Markets is 1 minute in. – [PAY ATTENTION TO HOW PROF TOM RIETZ EXPRESSES PRICES AS PROBABILITIES.]

Tip via John Delaney Jason Ruspini.

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Next: The Chicago candidacy, which was favored by the prediction markets (and gullible bettors like Ben Shannon), is the one that fared the worst.

Next: Why an analyst should assess each newly created prediction market.

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Why Chicago Tribune’s Bill Barnhart, Iowa Electronic Markets’ Thomas Rietz, University of Chicago Law School’s Cass Sunstein, Consensus Point’s David Perry and HedgeStreet’s Russell Andersson are totally incompetent prediction market analysts.

Those five incompetents would be better off minding their statement before singing like idiotic canaries.

Those five blablating incompetents are selling the idea that prediction markets to determine the next venue for the 2016 Summer Olympics is a great idea and would be accurate.

Here’s what happened to the Paris 2012 event derivative, my boys:

Chart courtesy of TradeSports-InTrade.

Here’s what I wrote:

TAKEAWAY: It’s very difficult to figure out what will be the decision of a small, secretive committee —whether it’s a group of aristocrats (International Olympic Committee) or a group of civil servants (U.K.’s Casino Advisory Panel).

Paris had the best case, but the Olympics aristocrats chose London anyway.

Same picture for the UK’s Super Casino: Blackpool was the BetFair favorite (62.5%), but the committee picked up Manchester.

Please, Chicago Tribune’s Bill Barnhart, Iowa Electronic Markets’ Thomas Rietz, University of Chicago Law School’s Cass Sunstein, Consensus Point’s David Perry, HedgeStreet’s Russell Andersson, tell the truth; don’t sell fantasy.

And if you are completely incompetent, then leave your seat to someone else.

Next: Will Chicago get the Olympics? Don’t bet on it. Too risky.

Next: Chicago won’t have the Olympics in 2016.

Next: Could we have divined that Chicago was a lemon?