Certainly not Chris Masse, says Emile Servan-Schreiber of NewsFutures:
[…] No, HSX box-office predictions are forecasts, not event probabilities, so if you restrict the definition to event probabilities, you exclude most of HSX. Same for “vote-share” markets at IEM. […]
Read the whole conversation (including the last Jason Ruspini comment) and decide for yourself. Now that Robin Hanson left us high and dry, who will write the broadest definition of prediction markets?
Dion Hinchcliffe on applying the concept of “-Enterprise 2″-:
I’ve witnessed prediction markets in particular become enormously popular in the last year or so as enterprises seek to better tap into the cumulative wisdom of their workers.
If only 5% of the Fortune-500 firms are currently experimenting with an internal prediction exchange (betting exchange), then you shouldn’-t use the words…- “-enormously popular”-…- yet.
Wikipedia:
A network effect is a characteristic that causes a good or service to have a value to a potential customer which depends on the number of other customers who own the good or are users of the service. In other words, the number of prior adopters is a term in the value available to the next adopter.
One consequence of a network effect is that the purchase of a good by one individual indirectly benefits others who own the good — for example by purchasing a telephone a person makes other telephones more useful. This type of side-effect in a transaction is known as an externality in economics, and externalities arising from network effects are known as network externalities. The resulting bandwagon effect is an example of a positive feedback loop. […]
Network effect business examples
Financial exchanges
Stock exchanges and derivatives exchanges feature a network effect. Market liquidity is a major determinant of transaction cost in the sale or purchase of a security, as a bid-ask spread exists between the price at which a purchase can be done versus the price at which the sale of the same security can be done. [*] As the number of buyers and sellers on an exchange increases, liquidity increases, and transaction costs decrease. This then attracts a larger number of buyers and sellers to the exchange.
The network advantage of financial exchanges is apparent in the difficulty that startup exchanges have in dislodging a dominant exchange. For example, the Chicago Board of Trade has retained overwhelming dominance of trading in US Treasury Bond futures despite the startup of Eurex US trading of identical futures contracts. Similarly, the Chicago Mercantile Exchange has maintained a dominance in trading of Eurobond interest rate futures despite a challenge from Euronext.Liffe. […]
[*] Niall O’-Connor should report on bid-ask spreads, not just on dollar value of matched bets, when comparing BetFair with its competitors.
I think so*, although it could be a matter for states to decide, and not so much the federal government. In that scenario, my thought is that some liberal (in the classic sense) states will allow experimentation with prediction markets, and the informational value (at least over surveys and polls) will eventually sweep the nation. But that could take decades.
I was thinking about the constitutionality of prediction markets when reading Gary McDowell’-s “-The War For the Constitution”-:
Warren Burger summed it up for many when he described Mr. Bork as simply the best qualified nominee in the former chief justice’-s own professional lifetime —- a span of years that included the appointments of such judicial luminaries as Benjamin Cardozo, Hugo Black and Felix Frankfurter. Such praise was no empty exaggeration.
A former Yale law professor and U.S. Solicitor General, Mr. Bork was, at the time of his nomination, a judge on the United States Court of Appeals for the District of Columbia Circuit. When he was a circuit court judge, Mr. Bork’-s opinions not only were never overruled on appeal, but on several occasions his dissents were adopted by the Supreme Court as its majority view.
In an earlier day such an appointment would have been celebrated as adding breadth, depth and luster to the highest bench. Instead, the nominee faced a mauling by those who set out not only to destroy him personally but to discredit all that he stood for as a jurist.
It was immediately clear that the unprecedented vote of 58-42 against his confirmation reflected something far more historic and fundamental than an ordinary partisan standoff. The confrontation in fact had been one of the most cataclysmic and divisive events in American domestic politics during the second half of the 20th century. The reason was that Mr. Bork’-s opponents succeeded in making the fight over his nomination into a contest over the future of the Constitution.
* * *
Time has shown that Mr. Bork’-s theory of constitutional interpretation remains very much alive- he was defeated but his central idea was never discredited. That theory of interpretation and its implicit belief in restrained judging should continue to guide anyone who believes that the inherent arbitrariness of government by judiciary is not the same thing as the rule of law.
One thing that is more scary than irrational voters is whimsical judges. And I know a few, personally.
*Off the top of my head, free speech and peaceful assembly seem to enable our rights to prediction markets.
UPDATE: Chris Masse linked prediction markets to the right to privacy here last year. I’-m not sure that is as relevant as speech and assembly–-the whole point being prices from prediction markets is a public good (even as I concede that the anonymity of traders improves prices). But what do I know–-I’-m not an attorney or judge, just someone who knows a lot of them.
UPDATE: Tom Bell, on the Constitution’-s call for progress in science and arts.
UPDATE: Alvin Roth, on the repugnance of markets (including prediction markets in terror). This reframes my point–-constitutional repugnance is good, fleeting cultural repugnance is irrelevant. Just as slavery markets were not repugnant yesterday (but unconstitutional), so prediction markets are repugnant today (but constitutional)!
Cross posted from Caveat Bettor.
Read the previous blog posts by Caveat Bettor:
Two things I heard this morning on the radio:
The kind of bad news you’-ll never hear at Caveat Bettor. 
[See his comment!!]
Previous blog posts by Chris F. Masse:
Dear Midas Oracle readers,
It’-s not the first time that I read an opinion piece lambasting Vista on the CNET site.
I would like to see a long-term prediction market at PopSci PPX on whether Vista will start off and be more popular than XP, one day. I’-d short-sell everything like crazy.
Previous blog posts by Chris F. Masse:
InTrade-TradeSports:
PREDICTION MARKET INDUSTRY ASSOCIATION IS BORN
Monday, Oct 22, 2007
PREDICTION MARKET INDUSTRY ASSOCIATION IS BORN
Industry and thought leaders join forces to help promote and grow the field of prediction markets.
London (Oct 22 2007) – The recent Prediction Market Summit held in London, UK, concluded with the creation of an international industry association tasked with promoting awareness, education and validation for the rapidly growing field.
Participants at the summit reflected the rich international and dynamic texture of the field, including veteran industry leaders such as Hollywood Stock Exchange (US), Intrade (IRL), NewsFutures (US), and Pro:kons (AU), as well as newer entrants such as Gexid (DE), Mercury (UK), Nosco (DK) and Xpree (US). Also present were many members of the international academic community from institutions in the UK, Scandinavia, Germany, Ireland, and Japan, as well as representatives of Schlumberger, Microsoft, Nokia and other companies using or considering the use of prediction markets in the operation of their business.
The Prediction Market Industry Association (”-PMIA”-) will focus on initiatives that can benefit all stake-holders while not hampering the healthy competition and rapid innovation that characterizes the field. Concretely, its first priorities are to:
1) Create a central, standardized registry of available prediction stocks and contracts from different prediction markets. This open central resource will help demonstrate the wide coverage of available predictions, facilitate search, and make prediction market data more easily available to researchers, the media, and the public at large. Participation will be entirely voluntary, and the program will leave each publisher in complete control of the commercial terms for accessing its data.
2) Offer a directory of its members, a library of core readings, and other such resources enabling newcomers to quickly learn about the field and find their way among the various worldwide offerings.3) Provide a consensual venue for sharing industry-relevant information and announcements, and organize regular meetings of the industry to discuss common opportunities.
4) Lobby for a clear legal and regulatory environment conducive to the productive adoption of prediction markets by individuals, firms, and governments, and ensuring free access to these markets by traders.To lead the collective effort on these initiatives, the summit participants chose a five member board of directors: three from industry and two from academia. Participants immediately came to consensus on the two academic members. The three industry board members, however, were elected in a secret ballot where voters could nominate any industry player whether present at the meeting or not. The PMIA’-s first board is comprised of:
Emile Servan-Schreiber (NewsFutures) Chairman
Jed Christiansen (Mercury Research &- Consulting) Treasurer
John Delaney (Intrade)
Robin Hanson (George Mason University)
Justin Wolfers (Wharton School, University of Pennsylvania)The board’-s first task will be to establish the association’-s bylaws, which will naturally include provisions for the regular rotation of the members of the board. A first draft will be published within the next two weeks and will be open to comment by all interested parties.
As it pursues the PMIA’-s collective benefit agenda, the board looks forward to drawing heavily from the prediction market community’-s extraordinarily rich and diverse pool of talent and experience. Comments, suggestions, and offers to help are most welcome. (We thank our friends at Nosco for graciously designing the association’-s logo.)
As of today, the Prediction-Markets Google Group is the official discussion venue of the association. (Thanks to John Maloney for turning over the keys of this valuable resource.) This discussion group will act as the de facto virtual home of the association while this website is in construction.
In recognition of the inspiration provided by the river Thames, on the banks of which it was born, and the fact that London is both the financial capital of the world and a historical bridge between the United States and Europe, where most of the activity in the field currently takes place, the PMIA board has chosen this city as its physical home.
###
For additional information contact:
Emile Servan-Schreiber T: +1 (443) 321-2700 E: [email protected]
Jed Christiansen T: +44 796 358 3663 E: [email protected]
John Delaney T: +353 1 6200 300 E: [email protected]
Robin Hanson E: [email protected]
Justin Wolfers E: [email protected]
NEXT: MIDAS ORACLE STATEMENT ON THE PREDICTION MARKET INDUSTRY ASSOCIATION
UPDATE: Their new website is born, EJSS tells us: Prediction Market Industry Association
External Link: The full list of all the industry associations at CFM.
Product line demand forecasting stands as the proto-typical application for internal prediction markets. Internal prediction markets may have other uses, but the demand forecasting story is probably the most straightforward and has been most often discussed in articles on the topic.
When software vendors and consultants try to sell prediction market systems to business, both the successes and the failures of existing forecasting systems likely stand as barriers. If the company’s current system is seen as successful, the company will have little motivation to change. If the company’s most recent million dollar system is a disaster, they will hesitate to leap into something new. I guess that leaves the moderately dissatisfied and mildly happy folks as likely sales targets.
An article in CIO highlights a demand forecasting disaster at Nike and discusses ways in which companies have adapted demand forecasting systems into business plans. The article was first published in 2003, so it is a few years old, but it stresses an important point – that a good system involves both software and people.
It’s been more than two years since Nike Chairman Phil Knight owned up to the sneaker giant’s disastrous $400 million experiment with demand forecasting software. The headlines are well known: Nike went live with its much-vaunted i2 system in June 2000, and nine months later, its executives acknowledged that they would be taking a major inventory write-off because the forecasts from the automated system had been so inaccurate. With that announcement in February 2001, Nike’s stock value plummeted, along with its reputation as an innovative user of technology.
… Nike isn’t the only company with a forecasting horror story. Corporate America is littered with companies that invested heavily in demand software but have little or nothing to show for it.
… Yet vendors and academics are still pushing forecasting software. In 2002 alone, companies spent $19 billion on demand forecasting software and other supply chain solutions, according to IDC (a sister company to CIO’s publisher). And in a speech in February, Stanford University supply chain guru Hau Lee extolled the virtues of harnessing software to extract customer knowledge in order to forecast demand.
Many CIOs, however, remain skeptical. Privately, members of Lee’s audience complained to a reporter present that the ability to accurately forecast could hardly be taken for granted. And according to a recent Booz, Allen &- Hamilton survey of 196 senior executives, 45 percent said that supply chain technology in general had failed to meet their expectations. More than half—56 percent—blamed the shortcoming squarely on demand forecasting software.
Of course it is easier to blame the software than to blame the humans in the systems, but the article suggests that any good system will need both.
Even forecasts that are made with a limited number of variables and with accurate data will be off. They still make the fundamental assumption that what was true yesterday will be true tomorrow. But because the data about a change lags behind the change itself, it takes human market watchers to note business climate alterations.
… “-When the future doesn’t resemble the past, none of this forecasting software works well,”- [Vicor CIO Doug] Richardson says.
… The mishap taught Vicor the necessity of factoring human intelligence into its forecasts. In order to make sure that it isn’t caught off guard again, the company set up a dual forecasting process in which the sales department comes up with a forecast and the computer system, which was upgraded a year ago, makes another. The two are complementary- the sales department is too conservative with its forecasts (Richardson thinks the salespeople are merely cautious- a cynic might point out that they are compensated for selling above quota).
The article discusses several other cases as well.
(Vicor adopted a forecasting system from Smart Software, and is now featured as a customer testimonial on the Smart Software site. Presumably, they’-re happier with their new system.)
Jed Christiansen:
It’s obvious that John wants InTrade to be much more successful than it has been, but he still clearly believes that InTrade can still be very successful. He mentioned that one key in their business is market makers- a few of their former market makers left, and that had a significant impact in the categories in which they participated. The new gambling laws in the US has had a significant impact on their business, but John is optimistic about the long-term potential of the industry in the States.
Regarding InTrade and TradeSports, John was clear that the companies are separate legal entities, with different management and employees. That said, he said that like a divorce, there are still connections between the two that take some time to replace. They are also looking into ways that individuals can submit contracts to trade on the exchange, similar to what you can do at Inkling. Clearly this would still be fairly tightly controlled, and judgement of the contracts would be done outside of InTrade by an independent entity.
John is disappointed that InTrade hasn’t grown more than they have. At the same time, he seems to be very optimistic about InTrade because their employees are still very motivated and morale continues to be strong. He also said he would fly to the US, but it would need to be for a good reason.
Finally, John addressed the infamous North Korea missile market. He was asked, “Was it a mistake?” He said both No and Yes. It wasn’t a mistake in that the market was judged according to a strict interpretation of the rules. At the same time, it was a mistake in that they didn’t handle the PR issue particularly well. His lesson learned was that they simply need to be incredibly careful regarding their market definitions.
On that last point, being the courageous web journalist at the center of this NKM storm, let me say this:
Previously: BetFair seems to say that InTrade-TradeSports’ illegal approach is not the best, on the long term. + InTrade expired the Larry Craig prediction market too early.