Yearly Archives: 2008

Prediction Markets: Powerful enough to be dangerous?

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Marc Groz of Topos Capital graciously invited me to deliver a guest lecture to his class at NYU last Wednesday. The talk, &#8220-Measured Enthusiasm for Prediction Markets&#8220-, was given to about 20 students, some with significant market experience. It introduced real money prediction and decision markets, then went off into tax and policy markets. As the title suggests, there wasn&#8217-t an evangelical focus, but I hope to have excited a few students about this new frontier. The presentation includes a couple of scenarios that I have not seen discussed yet in the usual places.

Cross-Posted from RM&amp-P

Is BetFair (a de facto monopoly) playing evil with traders and developers?

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Two serious issues.

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ISSUE ONE: The Sporting Exchange forbid any independent order-entry software for the BetFair prediction markets to be used for the other prediction exchanges.

Chris Gibbs:

BinarySoft Chris 22 Apr 17:59

Part of the agreement we signed with Betfair was that our product(s) are not allowed to access other exchanges simultaneously. I&#8217-m considering developing a separate product for the purple place, but I need to be convinced that it&#8217-s worth my time and effort first – realistically it&#8217-s a competitve enough marketplace on Betfair, which itself has around 95% of the betting exchange market.

Also, most of the API vendor software (including mine) would require significant re-design in order to have 2+ copies of the application running simultaneously, without requiring multiple monitors etc.

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My thoughts:

  1. This is a very grave issue.
  2. The (paying!!!) traders using any independent order-entry and analysis software package should have access to whatever prediction exchange of their choosing. Some British anti-monopoly agency should step in, here.
  3. As a result of BetFair&#8217-s monopolistic and evil behavior, we will never have any independent, multi-exchange, order-entry and analysis software packages. That is greatly needed, since the last decade has seen the creation of many (real-money or play-money) innovative prediction exchanges. It would be great to have one local software managing the totality of our portfolio of event derivatives, regardless of which exchange floats them.
  4. I don&#8217-t understand why BetFair is playing evil here. They have a naturally built de facto monopoly (95% of the betting exchange market in the U.K.). Betdaq is not a threat. That evil contract clause is unnecessary.

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ISSUE TWO: The Sporting Exchange has output a free order-entry software for the BetFair prediction markets, and the independent providers of order-entry and analysis software packages say it&#8217-s unfair competition to them.

Chris Gibbs:

Betfair should not be releasing free alternatives to products in the Solutions Directory, especially if it&#8217-s the case that they are not subject to the same data request limits as everyone else!

I don&#8217-t feel particularly threatened by Betfair Rapid at present, but Betfair probably have access to more resources (programmers) than all of the API Vendors combined.

Because it&#8217-s not a level playing field:
1) API Vendors pay Betfair ?200/month for full transactional access- the Betfair Rapid developers pay nothing.
2) API Vendors generate revenue by charging users a usage fee- Betfair Rapid can offer the product for free and Betfair benefits from the commission generated by Betfair Rapid users. Betfair also benefits from the commission generated by users of API Vendor software.

Ghetto – I wouldn&#8217-t be surprised if they add more and more features over time, what is there to stop them?

It&#8217-s not ridiculous at all – as explained above, it&#8217-s not a level playing field. Betfair are doing a very good job of alienating their API vendors – I&#8217-ve spoken to other vendors about this and they completely agree.

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My thoughts:

  1. The Sporting Exchange should apply the same rules to the BetFair Rapid unit and the independent developers.
  2. It&#8217-s good business for a company to have a network of third-party applications. I have Apple Macintosh and Twitter in mind, right now. These third-party applications add great value to the whole experience. It&#8217-s important to keep the third-party developers happy.

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UPDATE: Here&#8217-s the way to promote innovation for entry-order and analysis software packages &#8212-separate the 2 functions.

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Prediction markets can be directly subsidized with a market maker, allowing all traders who provide info to improve the price to expect to profit. Also, the more fools the more informed traders should be attracted to profit from them, so the mix is endogenous.

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Robin Hanson in a comment, over there.

See also that question for Mike &#8220-Barbecue&#8221- Giberson.

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Professor Koleman Strumpf explains the prediction markets to the countryland people.

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Ah, Kansas&#8230- Barbecues, pickup trucks, rednecks, country music, and&#8230- the local FOX News.

Despite that one blip on the radar [New Hampshire], Strumpf said futures are still the best way to predict the way things will go from here.

Spot the SIDEBAR (which is not located on the sidebar, actually), and click on the little square, just below &#8220-video&#8221-, to watch the report.

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Time magazine interview the 2 BetFair-Tradefair co-founders, and not a single time do they pronounce the magic words, prediction markets.

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Betting on a Market

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Edward Wray:

We&#8217-re one of the very, very few Internet betting companies that have never taken a bet out of the U.S., and that&#8217-s because our view has always been it is illegal, which it clearly is now, and so long as it&#8217-s illegal, we&#8217-re not going to do it. That&#8217-s a long-term strategy. Clearly some people made good money out of taking bets out of the U.S. in the short term, [and] have now found themselves in trouble with the authorities. Gambling should be regulated, we&#8217-re very comfortable with that. There are things that need to be safeguarded — how you look after vulnerable people, how you make sure it&#8217-s a clean, above board business, etc. — you don&#8217-t achieve that by prohibiting business. You achieve it by regulating it. The U.S. has tried prohibition once before and it wasn&#8217-t a roaring success. And I think they&#8217-ll find the same thing here. I don&#8217-t know how long it will take, but I&#8217-m more confident than ever that the U.S. market will open up, and when it does, we will be right at the hub of it. It&#8217-s frustrating to us that people in the U.S. can&#8217-t access Betfair. But we go out of our way to make sure they can&#8217-t because the law is the law and we will always respect that.

Who would you back, the market consensus or a book-writing pundit?

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'Bad Money' by Kevin Phillips

Tyler Cowen picks the market consensus over book-writing pundits:

Either the current market estimate of inflation is the best estimate available, or you know that it is wrong and you will be a very rich man. I find the former scenario more plausible.

Cowen is commenting on the Kevin Phillips book, Bad Money, recently out.

Of course book authors may be wary of going directly into the financial markets to wager their hard earned cash, which is why I have advocated prediction markets for pundits in which authors would have a chance to back their book-selling punditry with real money.

In Separating cheap talk from truly held beliefs, I wrote of political pundits with books:

Maybe they believe what they write, and would be willing to subsidize a prediction market out of their book royalties to demonstrate the strength of their convictions. Or how about the books from the current crop of U.S. presidential candidates—I wonder if these books contain any claims that are specific and substantive enough to be either true or false.

If such punditry-based prediction markets were common, mistaken-but-honest demagogues (those pundits who actually believe what they write, and are willing to stand behind it) would end up subsidizing more thoughtful analysts participating in the markets- correct honest demagogues would end up taking home larger financial rewards- and dishonest demagogues would dissemble, seek to avoid being pinned down on specific claims, and when pressed for actionable claims they would run and hide.

[Cross posted from Knowledge Problem]

??? charity-driven prediction markets OR social issue prediction markets ???

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BOTH.

But, contrary to what Lucy Berholtz thinks, the former will go further than the latter &#8212-in my view.

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My thoughts about the Financial Times article on Bet2Give:

  1. I have said from day one that it&#8217-s a great idea.
  2. This is a &#8220-unique&#8221- concept&#8230- until InTrade-TradeSports, Betdaq and BetFair-TradeSports decide to create a charity wallet for their traders. Complex, sure, but that might come, one day.
  3. I have the highest esteem for Lucy Berholtz, generally, but I&#8217-m with Emile Servan-Schreiber on the idea that Bet2Give is not a simple marketing trick. All the money but a small percentage goes to the traders&#8217- selected foundations. If all US betting were organized that way, that would mean a huge windfall for US foundations.
  4. Tyler Cowen makes sense.
  5. As for LongBets, it&#8217-s a failed experiment in my judgment. Too many one-sided &#8220-predictions&#8221- for only a fistful of agreed &#8220-bets&#8221-.

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The Marketing Of The Reading Of The Public Prediction Markets = What Robin Hanson has deep trouble with, and what the prediction exchanges (e.g., InTrade-TradeSports, BetFair-TradeFair) havent fully computed yet

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Robin Hanson on &#8220-silly&#8221- research topics:

[M]ost people think futarchy (government by [prediction] markets) is silly, even though most think it has a decent chance of performing well […].

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Decision markets and decision-aid markets are 2 great concepts pushed by Robin Hanson, the world&#8217-s #1 researcher in the field of prediction markets. But they are just inventions, not innovations. What is important is to find out which population segment or which class of business executives find this stuff productive and helpful.

In that perspective, his presidential prediction markets at InTrade are good ideas, and the liquidity there (helped by an AMM) is decent enough. But they are just betting supports, right now. I haven&#8217-t seen any opinion leaders taking them as a trusted source of information, which is the damn goal. We will see whether that comes true in the future.

If Robin Hanson were really serious in finding a killer app for his concept of decision-aid markets, he would of course come up with conditional prediction markets in the realm of sports, which is the most popular topic in the real-money prediction markets. Alas, I often have the impression that the academics in the field of prediction markets have profound disdain for sports prediction markets.

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Robin Hanson on seeking decision advice:

[…] We rarely seek out advice, and when we do it is usually on much smaller decisions. […] One reason we avoid getting advice is that it lowers our status relative to those who give advice. Of course this is also makes asking for advice a good way to flatter and supplicate. Not sure if this explains the puzzle though. But all this doesn&#8217-t seem to bode well for fielding decision markets on the biggest organizational decisions.

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Allow me to digress from there. I think that the reading from the prediction markets is like an advice &#8212-in that you have to accept the market message as an authority. If you are an expert with direct access to primary sources of information, I don&#8217-t think you&#8217-d rely on the message from the public prediction markets (which are information aggregation laggards). The big mistake from Robin Hanson and the others has been to sell the public prediction markets as tools for the decision makers. That could happen, but marginally, I believe. Experts and decision makers will firstly want to rely on their primary sources of information and on their analysis.

I think that the population segment which is the more likely to appreciate the consumption of market-generated probabilities would be composed of people who want a chopper view of world events. Prediction market journalism should satisfy this dashboard need.

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[Please note that the thoughts expressed above refer to the public prediction markets (as stated in the post title –think BetFair-TradeFair, InTrade-TradeSports, Betdaq, HubDub, NewsFutures, and Hollywood Stock Exchange) —not the enterprise prediction markets, which is a horse of another color.]

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Robin Hanson on decision-aid markets:

I don&#8217-t recall ever turning down a chance to consult on prediction markets for a Fortune-500 company. If you know of an opportunity that I&#8217-m missing, do let me know.

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Doc, are there more Fortune-500 executives and managers attending a conference on extra-terrestrials or a conference on finance? :-D

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