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These markets were quite popular. The 475 traders made over 27,000 transactions in the 139 available markets. As a matter of reference, that is about 200 transactions per market while in Google’s market this ratio is 260.

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There was a mix of both socially redeeming topics (issues of interest to the Business School such as how many internships the undergrads would get this school year) and others designed to attract interest (politics, sports, entertainment, finance). I was surprised to see that passions– and trade volume– ran quite high even in the more serious markets. For example, one contract’s expiry was based on whether the XM-Sirius merger would be consummated by March. When the DOJ announced its approval at the end of that month, there was only a small price increase. As the comments below suggest, this was not because the traders were asleep at the wheel but rather because they had a good understanding of the regulatory environment.

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Inkling Markets provided the platform for our markets (if you are unfamiliar with Inkling, they have active public markets which you can sample). Inkling’s software and support is really ideal for classroom markets. There are nice features for both the people running the markets (James and I) as well as for traders (the students).

For the market admin:

- it is a snap to set-up and administer new contracts

- Adam Siegel and Nate Kontny are very responsive to questions, often responding within the hour

For traders:

- an intuitive trade interface, which is accessible even for those without experience with financial markets (though this can be a drawback if you would also like students to become familiar with order books)

- lots of goodies (customizable profile pages, market-specific discussion boards, graphs) leads students to visit the market a lot

- the daily/weekly top traders list encourages participation

I would strongly recommend others give prediction markets in the classroom a try. I found them to be both a great pedagogical tool and also one which the students really, really like. Students learned first hand about the role of information discovery as well as the biases often seen in prediction markets (though I will add it was difficult to illustrate the home town bias given the success of the athletic teams at my school this year). Feel free to get in touch with me if you have questions about how to set-up your own classroom markets.

FOREMAN: I’ve got something I want you to take a look at. Look at this. It could be the price of a stock or a mutual fund. It isn’t. It’s the odds that a particular candidate, the red here is Hillary Clinton, who will become president of the United States. It’s called the predictive market. And while supporters say it’s no different than any other type of investment, for example, hog bellies or pork futures, or crude oil, it sure looks like gambling.

Economics Professor Koleman Strumpf is on the faculty at the University of Kansas School of Business to talk about it now. And in Las Vegas, another scholar in the art of predicting future events, Johnny Avello, the director of the Sports Book at Wynn, Las Vegas.

Let me start with you, professor. How well does this work? When people start betting online as to who’s going to win, does it work?

KOLEMAN STRUMPF, UNIVERSITY OF KANSAS: Yes, the markets have a really tremendous track record dating back at least on the online markets to 1988. And actually earlier, there were impromptu markets that existed outside of Wall Street in the early 20th century.

These things have been around for at least 100 years or probably more. 150 years. And with maybe only one or two exceptions that I can think of, they’ve done a just totally dead on job at forecasting.

[FOREMAN]: Long before polling existed, then you’re saying we had betting. And there were betting lines in newspapers. And if you want to know who’s winning the presidential race, that’s what you looked at?

STRUMPF: That’s exactly right. So in 1904, “The New York Times” reported on the front page what was going on at the Wall Street betting markets since there was no Gallup Poll that existed at that time.

FOREMAN: Johnny, why do you think that this is generally so successful compared to polling?

JOHN AVELLO, DIR. OF RACE & SPORTS, WYNN HOTEL: Well, first of all, you are taking actual bets. And you know, each person that puts their money up is a good indication of, you know, which way they like it.

When you’re doing polling, you know, that’s kind of an ambiguous way of finding out who the winner is because you’re getting a fraction of the people who you’re actually finding out who they like. So I like to call it money versus unpredictability.

FOREMAN: You’re saying the difference is that in a poll, somebody may say something that they believe in generally, or they think that the pollster wants to hear. But when they put money down, they’re going to really bet on what they think is going to happen?

AVELLO: It’s the real thing.

FOREMAN: It’s sort of interesting when you look at these different types of polls. There’s the In Trade system, which is out of Dublin, Ireland that’s sort of interesting. In Trade allows people to bet actual money and large amounts of it on all sorts of outcomes all around the world.

The Iowa markets is one the people have talked about a lot. Set up by a university there. Basically the Iowa markets allow people to bet in limited amounts of money. About $500. And it’s used simply to see how well this works for educational purposes mainly.

Professor, when we talk about these, though, why did polling ever become popular if betting works so well in telling how we would win?

STRUMPF: Well, I think a kind of — much like today, the newspapers, the media was always uncomfortable reporting these markets. There sort of was dubious legal status and maybe some moral issues with it.

Polling for whatever reason seems to have been morally acceptable to the media. And I think as a result when Gallup came around in the late 1930s, the betting markets kind of fell by the wayside. They never of course disappeared, but I think it was sort of a moral issue, the same kind of moral issues that I think arise today in thinking about gambling.

FOREMAN: So let me ask you this, Johnny. Why do you think it’s been so difficult this year, though? Because as far as we can tell, the betting lines have not done any better than the pollsters this year in predicting this election. It has been all over the map. And the betting has been all over the map.

AVELLO: Well, one thing to remember, Tom, is that when the book maker’s putting up a line, what they’re trying to accomplish is divided action. So they’re not trying to pick the winner because let’s take for instance if the book maker put up Hillary Clinton at one to two, and she was bet from to three to win the Democratic nomination. You know, and Obama won. People would say, wow, the book maker really got killed on that.

FOREMAN: The book maker’s not trying to predict it, but obviously, the gamblers are, the people who are betting on these things. And they haven’t done well this time, not compared to past elections. Why do you think that is? Why is this so hard to sort out?

AVELLO: Because they’re not always right. No one’s right at 100 percent of the time. I would say best case. You know, I know that history has shown that the bettor has done well on this. But to be perfectly honest with you, I think if you do 60 percent, you’ve done a great job of picking the winner.

FOREMAN: And Koleman, do you think there’s anything unique that’s making it harder for the betting markets to be as accurate as they had been in the past?

STRUMPF: Well, it’s obviously a close market and opinions are changing rapidly. I just want to kind of maybe extend a little on what Johnny just said in terms of thinking about what these markets mean.

The markets give us a probability of an event occurring. So even if, for example, Obama is a 80 percent favorite in the upcoming Wisconsin primary, which he is, that still means on the flip side that there’s a 20 percent chance that he’s not going to win. So the markets, again as Johnny had said, don’t – they – by sort of definition can’t predict an upset. An upset is a surprise which people hadn’t anticipated. So sometimes there are these quick shifts of opinion, which I — to the best of my knowledge, there’s no way to forecast that in advance.

FOREMAN: And this campaign has been just filled with them. Johnny, one last thing here. Any sense of where the smart money is going these days?

AVELLO: Well, let’s say that there’s been a shift. I believe the smart money was on Hillary Clinton early, and has shifted to Obama. But surprises do happen. And all you need to do is look at the Superbowl to find that out.

FOREMAN: Johnny, thanks so much. Koleman, as well. We appreciate you being here. And speaking of gambling, Madame Tussaud’s Wax Museum here in Washington is hedging its bet. And that kicks off our political side show.

The Journal of Prediction Markets

Editor:
Leighton Vaughan Williams

Associate Editors:
John Delaney – CEO InTrade
Bruno Deschamps – University of Bath
Olivier Gergaud РUniversit̩ de Reims Champagne-Ardennes
Robin Hanson – George Mason University
Charles Noussair – Emory University
Marco Ottaviani – Ex-London Business School
David Paton – Nottingham University Business School
Paul Rhode – University of Arizona
Emile Servan-Schreiber – CEO NewsFutures
Michael Smith – Canterbury University
Martin Spann – University of Passau
Koleman Strumpf – University of Kansas School of Business
Justin Wolfers – University of Pennsylvania
Erik Snowberg – Stanford Graduate School of Business
Eric Zitzewitz – Stanford Graduate School of Business

I’d answer “yes” to my questions stated in the title of this post. These guys should be judged on the quality of their intellectual output —me thinks. Period.

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Prediction Market Industry Association – (PMIA):

Prediction Market Industry Association – (PMIA)

Emile Servan-Schreiber T: +1 (443) 321-2700 E: ejss@newsfutures.com
Jed Christiansen T: +44 796 358 3663 E: jed.christiansen@mercury-rac.com
John Delaney T: +353 1 6200 300 E: john.delaney@intrade.com
Robin Hanson E: rhanson@gmu.edu
Justin Wolfers E: jwolfers@wharton.upenn.edu

I can understand that some, like Niall O’Connor, have reservations on this mixing of interests, though.

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But we should judge these scholars and professionals on what they deliver —not whom they talk to, or associate themselves with.

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OUR HISTORY VIGNETTE:

Now you, too, can predict hurricanes. – [HedgeStreet | Forecasting Center - (Hurricanes) | Dashboard] – 2006-09-04

• They claim it offers hurricane-weary residents a way to hedge their risk, and could develop into a powerful tool for predicting storm damage. What it’s not, said Bill McIntosh, vice president of marketing for HedgeStreet, is a meteorological bookmaking operation. “Capital markets like ours allow for trading or transfer of economic risk that is already there,” he said. “Gambling is the creation of an artificial risk purely for entertainment.“
• “I think it would be the most accurate way,” said Richard Borghesi, a Texas State University assistant professor of finance who specializes in prediction markets. Borghesi, however, isn’t sold on the ability of the new market to allow people to hedge against hurricane risk. “If you own a house and a hurricane is heading towards you, you would have to bet a lot of money to hedge your risk,” he said. Koleman Strumpf, Koch Professor of Economics at the University of Kansas School of Business, has a similar view of the predictive value of markets. He said that HedgeStreet’s hurricane market could become a good tool if it drew a diverse pool of investors with credible knowledge.
• Although futures markets can be good predictors, there are no guarantees, Strumpf said. A good way to judge such markets is by how close the asking price and the bidding price are. Within a dollar or two is best, Strumpf said. By that measure, HedgeStreet has a ways to go with its hurricane market. People haven’t exactly flocked to it yet. Trades over the first couple weeks are measured in the dozens, and there’s commonly a $5 or $10 difference, or even more, between a bidding price and an asking price. That doesn’t bother McIntosh. He believes the new market simply needs time to develop. He also said investing on hurricane futures isn’t that outlandish when you consider that such markets have been accurately predicting political races for at least 100 years and weather related agricultural commodities for centuries.
• “I think it’s the wave of the future,” said Robert Dubil, HedgeStreet’s chief market strategist. “The question with everything is, how long will the future take?“

Note: Both Bill McIntosh and Robert Dubil left HedgeStreet.

GOP Keeps Senate, Loses House, Betting Site Says. – [US political prediction markets] – by Ronald Kessler – 2006-10-24

One theory is that prediction markets are influenced by the results of opinion polls. But if that were true, individual polls would also influence each other. Moreover, long before the Internet and opinion polls came into existence, election betting was accurately predicting election outcomes. From 1884 to 1940, betting was conducted on Wall Street by specialized brokers called betting commissioners. The betting odds for each candidate were published daily in the New York Times and other papers. The so-called New York betting markets correctly predicted 12 of the 13 presidential elections between 1884 and 1940, according to Koleman S. Strumpf, Koch professor of economics, University of Kansas School of Business, who co-authored a paper examining the markets. In the one exception, the betting swung to even odds by the time the polls closed. The Gallup Poll, the first scientific opinion poll, began in 1935. The arrival of opinion polls and stricter anti-gambling laws drove out the New York betting markets. The Internet has led to their revival.

Paper: Historical Prediction Markets: Wagering on Presidential Elections – (PDF) – by Paul W. Rhode and Koleman S. Strumpf – 2003-11-10

My Question: Before 1935 (that’s when George Gallup crafted the first scientific polls), what the hell those political prediction markets were aggregating, for Christ’s sake??? And where is our good doctor Koleman Strumpf when we need him?