The right way to implement a multi-outcome prediction market: Linear programming

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Over on Oddhead Blog, I give a lengthy pitch for linear programming as the &#8220-right&#8221- way to implement a multi-outcome prediction market.

I argue that the simplest and most common approach &#8212- to treat a multi-outcome market as a bunch of independent single-outcome markets &#8212- is wrong, even though it&#8217-s the approach taken by most prediction markets, bookmakers, and financial exchanges.

I also argue that

  • IEM&#8217-s implementation is one of the worst
  • Intrade&#8217-s is slightly better but not much
  • Newsfutures&#8217-s and Chris Hibbert&#8217-s phantom bids approach is even better
  • A host of people* hit on the best approach, many well before I did, advocating linear programming as a natural matching engine for multi-outcome markets
&nbsp-*Including Baron, Bossaerts, Chen, Economides, Fine, Fortnow, Kilian, Lange, Ledyard, Nikolova, Pennock, Peters, So, Wellman, and Ye.

4 thoughts on “The right way to implement a multi-outcome prediction market: Linear programming

  1. Jason Ruspini said:

    I hope to see more linear programming implementations. On a practical note, there are some reasons why a continuous auction is more fit than a call auction, and it might be hard to get a continuous auction going while constrained to not taking on risk. Maximizing liquidity and taking no risk are basically at odds. I am told that the economic derivatives were pulled because one of the banks ended-up taking (insufficiently profitable!) positions to tighten the market. Whatever the mechanism, there will likely be an instance of human price-setting by the market-maker/sponsor, and minimizing the damage, especially in the early stages, is important.

  2. David Pennock said:

    Great points. Agreed. Interesting about the econ derivatives closure.

    It should be possible to run the linear program in continuous mode, identifying matches as soon as they arise. This is I believe a strict generalization of the typical continuous double auction, so should have a least as much liquidity as a CDA.

  3. Chris. F. Masse said:

    Don’t mind this comment. I’m testing the comment system…

  4. BetFair's brand-new matching-bet logic is endorsed by the Chairman of the Midas Oracle Advisory Board. | Midas Oracle .ORG said:

    […] see Hibbert’s “Market Makers for Multi Outcome Markets” and Dave Pennock’s “Right Way to Implement a Multi-Outcome Market.”) If they’ve done something like this, it should make their markets work more efficiently. […]

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