Category Archives: All Best Posts Ever

NewsFutures Emile Servan-Schreiber has two lines of defense for the prediction markets.

Posted on by
3

And a slam at the InTrade fanboys:

[&#8230-] The classic first line of defense in these cases is to remind people that market “predictions” are really just probabilities [*], so any one outcome cannot invalidate the approach. The argument is sound and backed up by loads of data. But it would of course be much more convincing if we, as an industry, would remember to show at least as much humility when our market “predictions” appear correct instead. If you’re going to spread the idea that your market called all 50 states in the last U.S. presidential election because each correct outcome was predicted with over 50% chance, then you can’t hide behind probabilities when an 80% prediction comes to naught, as in Obama’s NH collapse. [&#8230-]

Excellent point, my Lord.

[*] Note that Midas Oracle is stuffed with phrases like &#8220-probabilistic predictions expressed in percentages&#8221-, and full of charts showing these probabilities.

Go reading his second point, now.

[&#8230-] capturing the consensus opinion in a much finer and dynamic way than all the amorphous media buzz [&#8230-]

&#8212-

TECHNICAL NOTE:

Because NewsFutures is a strictly hierarchical company, I assume the piece is from EJSS, even though our smart man did not sign it. Bad Karma. Anonymous texts have no weight on the Internet.

On the Internet, nobody knows you’re a dog.

Author Profile&nbsp-Editor and Publisher of Midas Oracle .ORG .NET .COM &#8212- Chris Masse&#8217-s mugshot &#8212- Contact Chris Masse &#8212- Chris Masse&#8217-s LinkedIn profile &#8212- Chris Masse&#8217-s FaceBook profile &#8212- Chris Masse&#8217-s Google profile &#8212- Sophia-Antipolis, France, E.U. Read more from this author&#8230-

Read the previous blog posts by Chris. F. Masse:

  • Good news: The BetFair blog now features a prediction market column. — Bad news: Their columnist is an anonymous writer with long hair… and dubious skills.
  • Once again, a BetFair spin doctor misunderstands the prediction market approach.
  • Grandizer
  • Tss… Tss… Surely, you are joking Doctor Giberson.
  • Comments are still open on Midas Oracle.
  • “I am much more aligned with InTrade than you are, Chris.”
  • And the award for the most technology advanced software vendor goes to… the envelope, please…. QMARKETS in Israel. … [Cheers and applauses in the crowd.]

Prediction Markets 101

Posted on by
Reply

No Gravatar

Prediction markets produce dynamic, objective probabilistic predictions on the outcomes of future events by aggregating disparate pieces of information that traders bring when they agree on prices. Prediction markets are meta forecasting tools that feed on advanced indicators (like polls and surveys). Garbage in, garbage out&#8230- Intelligence in, intelligence out&#8230-

A prediction market is a market for a contract that yields payments based on the outcome of a partially uncertain future event, such as an election. A contract pays $100 only if candidate X wins the election, and $0 otherwise. When the market price of an X contract is $60, the prediction market believes that candidate X has a 60% chance of winning the election. The price of this event derivative can be interpreted as the objective probability of the future outcome (i.e., its most statistically accurate forecast). A 60% probability means that, in a series of events each with a 60% probability, then 60 times out of 100, the favored outcome will occur- and 40 times out of 100, the unfavored outcome will occur.

Each prediction exchange organizes its own set of real-money and/or play-money markets, using either a CDA or a MSR mechanism.

&#8212-

Any comment, Michael Giberson? :-D

&#8212-

Credits given to:

– Chris Masse-.

– Justin Wolfers.

– Robin Hanson.

– Jason Ruspini.

– Caveat Bettor.

– John Tierney.

– Jonathan Kennedy.

– Mike Giberson.

– Eric Zitzewitz.

– Cass Sunstein.

– Steve Roman,

– Nigel Eccles.

– The Everyday Economist.

– Adam Siegel.

– George Tziralis.

– Leighton Vaughan-Williams.

– Emile Servan-Schreiber.

– &#8220-Thrutch&#8220-.

– Panos Ipeirotis.

Prediction Markets 101 – Chapter One: Interpreting The Probabilistic Predictions

Posted on by
Reply

&#8220-Thrutch&#8221-:

Probabilities, Prediction Markets, and Popular Fallacies

With Hillary&#8217-s surprise victory over Obama in the New Hampshire primary, pundits everywhere are decrying the allegedly &#8216-wrong&#8217- odds that prediction markets like Intrade were displaying prior to the announced results. (As just one example, Barry Ritholtz weighs in with his &#8216-explanation&#8217- of : &#8220-Why Opinion Markets Fail&#8220-.)

At one point the betting markets were implying over a 90% probability for Obama to win. Does this mean they were &#8216-wrong&#8217-? No it does not. It is impossible to judge whether a given probability is/was correct based on the outcome of a single event.

A 90% probability simply implies that, if you encounter a series of events each with a 90% probability, then 9 times out of 10, the favored outcome will occur- and 1 time out of 10, the unfavored outcome will occur. Those like Ritholtz who are now calling the prediction markets &#8216-wrong&#8217- are implying the following: if the probability is 90% for an outcome to occur, then that outcome should occur every time. In other words, if the odds are 90% in favor of something &#8212- it should happen 100% of the time! But this is obviously fallacious. If the outcome occurs 100% of the time, then the correct probability to assign to it would be 100% &#8212- not 90%.

To validly assess the accuracy of prediction markets, one needs to aggregate all the situations where the odds were 90%, and then calculate whether the favored outcome indeed occurred 90% of the time. (And do the same with each level of probability.) This &#8212- and only this &#8212- will tell you how accurate prediction markets tend to be.

Barry Ritholtz:

As every good prognosticator knows, if you couch your forecasts in probabilities, the innumeric will never know you were wrong. It&#8217-s a cheap trick for the easily fooled.

Imagine if instead of a &#8220-THE END IS NEAR&#8221- sign, every loon carried a sign that proclaimed:

THERE IS A 57% CHANCE THAT THE END IS NEAR!!!

The fact that this didn&#8217-t happen &#8212- and the 43% probability did &#8212- doesn&#8217-t mean this forecast was accurate. It merely meant that the person had proferred two possibilities and one of those two occurred. But the math remains unverified.

Neat trick: By your definition, PREDICTION MARKETS CAN NEVER BE WRONG, so long as they maintain a 1% possibility of the alternative outcome.

That&#8217-s hardly a satisfying defense&#8230-

Author Profile&nbsp-Editor and Publisher of Midas Oracle .ORG .NET .COM &#8212- Chris Masse&#8217-s mugshot &#8212- Contact Chris Masse &#8212- Chris Masse&#8217-s LinkedIn profile &#8212- Chris Masse&#8217-s FaceBook profile &#8212- Chris Masse&#8217-s Google profile &#8212- Sophia-Antipolis, France, E.U. Read more from this author&#8230-

Read the previous blog posts by Chris. F. Masse:

  • Good news: The BetFair blog now features a prediction market column. — Bad news: Their columnist is an anonymous writer with long hair… and dubious skills.
  • Once again, a BetFair spin doctor misunderstands the prediction market approach.
  • Grandizer
  • Tss… Tss… Surely, you are joking Doctor Giberson.
  • Comments are still open on Midas Oracle.
  • “I am much more aligned with InTrade than you are, Chris.”
  • And the award for the most technology advanced software vendor goes to… the envelope, please…. QMARKETS in Israel. … [Cheers and applauses in the crowd.]

GIGO and prophets, tears and markets

Posted on by
Reply

No Gravatar

Prediction markets failed to accurately predict the unexpected effect a few tears had on the New Hampshire primaries- and some analysts rushed to blame the tool and undermine its reliability and applicability. Let me restate some fundamentals and my view, in a snapshot:

  • Markets are not prophets, prophets do not exist.
  • A mechanism&#8217-s forecastability should not be judged against a virtual fool-proof prophet- we&#8217-d better compare it with other existing or widely-used mechanisms and -to my partial and context-bound knowledge- markets outperform all those.
  • Markets are the only tool that intrinsically suggests their probability of failure. If Obama&#8217-s stock is traded at 70 cents, this suggests that there is a 30% probability of Obama losing- I&#8217-d say markets are by character modest and no fanfare has any place in describing their suggestions.
  • Markets are primarily an aggregation/meta mechanism- as such, garbage-in-garbage-out effects are expected to happen, so we&#8217-d need to keep focus on minimizing garbage rather than blaming the market/compiler.
  • Maturity of the mechanism and its use, as long as trading volume (in real-money intrade for example), have not yet reached a fully efficient level (more on this to come soon), but these result in significant profit opportunities, so I expect things to just keep getting better.

cross-posted from my blog

Five Reasons the Prediction Market Critics Are Wrong.

Posted on by
3

No Gravatar

1. It really was an upset – As it has been pointed out elsewhere, the Clinton victory was a surprise to everyone. Favorites can lose. But so what? Ordinarily, that’s not a market flaw or a reason to doubt the odds shown in the market.

Justin Wolfers article in the WSJ had the best summary:

Against this background, it is no exaggeration to term the result truly historic. Not that there haven&#8217-t been more dramatic upsets or come-from-behind wins that carried more significance &#8212- this was just an early primary, albeit a pivotal one. But in terms of unpredictability, or at least the failure of everyone to predict it, it may have no modern match.
…
Historical comparisons are already being drawn between the New Hampshire primary and the famous 1948 presidential race…Yet the magnitude of the Clinton surprise is arguably even greater&#8230-Thus, Sen. Clinton&#8217-s victory on Tuesday was more surprising than President Truman&#8217-s in 1948.

Given the above, were the Clinton prices on Intrade very far off? It&#8217-s not obvious that they were.

2. Pundits/Critics are NOT traders – If I believe a contract should be trading around 30 and I see it trading at 7, it would make my day. As a trader, seeing a contract that is clearly mispriced is a good thing. Traders who remember the French politician Le Pen’s strong showing in 2002 vs his polls or who read Steve Sailer’s blog should not be surprised that people are dishonest with pollsters. However, to a pundit, an isolated incident of mispricing means the entire concept of prediction markets is faulty.

Since NH results, pundits have been asking, “Are prediction markets flawed?” The traders who make and move the market don’t believe so- they are trading more than ever. In any case, there were no postings on the 7th of January about how wrong the prediction markets are, only after-the-fact postings demonstrating perfect 20/20 hindsight. Traders, not critics, will determine the success of the prediction markets.

Let us not forget that pundits have an agenda too. For some, especially political ones, they need to present themselves as being able to offer insight that no one else has. Since prediction markets allow events to be quantified in real time, the pundits have less to add. This makes critics especially eager to take some of the shine off prediction markets and make themselves look smarter by comparison.

Additionally, there is a contingent of commentators and bloggers with an anti-market bias who delight in seeing any market based tool be wrong. They will be the first to loudly smear PM errors but no where to be found when the market turns out to be right.

3. PMs are not polls – This common mistake is exemplified by this quote from the Chicago Tribune, “The New Hampshire primary was a reminder that prediction markets, where bettors are putting money on the line, can have no more value than opinion polls, where participation costs nothing.” This critic missed the point and doesn&#8217-t realize he is comparing apples and oranges.

Most commentators have focused on the accuracy of the market prices without touching on the underlying purpose of the market: speculation and hedging. Even if the polls are no more accurate than the market, they still can’t be used for trading functions.

4. Regulations have hurt the accuracy and liquidity of PMs – The inconvenience of opening a trading account at Intrade has excluded many Americans from participating. What is the cost of accuracy to the PMs? Surowiecki’s The Wisdom of Crowds lists four factors necessary for a wise crowd: diversity of opinion, independence, decentralization, and aggregation. At least two of these have been highly restricted due to regulations. Even so, the market is usually more accurate than the polls. None of the critics has pointed out that with so many potential traders cut off from trading, the market is surely excluding informed participants.

5. “Serious people who study or work with these markets are not in the &#8216-markets are magic&#8217- camp” – Prediction markets are like other financial markets: fat tails, black swans, bubbles, “manipulations” etc. These are all visible in housing, equities, and fixed income markets as well and no one speculates about the end of those instruments. As Eric Zitzewitz pointed out, the “markets are magic” crowd is just a strawman and not a logical basis to attack prediction markets.

Digg Link:

http://digg.com/business_finance/Top_Five_Reasons&#8230-

Prediction markets = A tool for quantifying the conventional wisdom

Posted on by
Reply

No GravatarEric Zitzewitz responded to Paul Krugman:

Almost all of the serious people who study or work with these markets are not in the “markets are magic” camp.

My work in this area (with Justin Wolfers usually and Andrew Leigh and Erik Snowberg occassionally) uses these markets as a way of quantifying the conventional wisdom.

This has more value than may be immediately apparent. It can help you get from “the market rose 0.25% in response to Obama’s Iowa victory” to “the market rose 0.25% in response to Obama’s Iowa victory, which raised his nomination probability by 20% and did not affect the Democrats odds of winning in November” to an estimate of how much more stocks will be worth under Obama than Edwards or Clinton.

In corporate settings, a market can help turn something that “everyone knows” into an objective fact that can then be acted upon. The best example is probably markets on whether software projects will be completed on time– if a market run among the project team members says that the launch will be 2 months late, it becomes harder for the project manager to insist that everything is on track.

Eric Zitzewitz
Assoc. Prof. of Econ
Dartmouth College

Thanks to Jason Ruspini for the link. Jason also posted a comment on Paul Krugman&#8217-s post, and also on Felix Salmon&#8217-s post.

Previous blog posts by Chris F. Masse:

  • NUCLEAR SCANDAL: HubDub allow their traders to bet on celebrities’ death.
  • APRIL FOOL’S DAY: This year, again, CNET makes fun of the wisdom of crowds.
  • Play-money prediction exchange HubDub is a phenomenal success.
  • BetFair Australia’s spin doctor tells all about their payments to the horse race industry.
  • Meet Jeffrey Ma (at right on the photo), the ProTrade co-founder, and whose gambling life is the basis of the upcoming movie, 21.

The prediction markets reflect the polls and the national media.

Posted on by
Reply

No GravatarJason Ruspini:

In general, futures markets are &#8220-less futures markets than immediate-past markets&#8221-.

It is hard to evaluate the markets fairly given how difficult it is for someone in New Hampshire to participate in them. Naturally then, the [prediction] markets more easily come to reflect the polls and national media – which were wrong in this case. (Here, the left-leaning media fell in love with Obama, while the right-leaning media happily went about trying to bury the Clinton &#8220-dynasty&#8221-. Consider the tremendously misleading FOX NEWS clip that PoliticalBetting.com linked to over the weekend.)

The legal situation also damages liquidity to the point where these markets are usually manipulated at the margin, as traders with momentum sense a rout and begin to engage in predatory trading, i.e. pushing prices to extremes to force capitulation and/or margin blow-ups.

Dr. Servan-Shrieber&#8217-s comment suggests that these market errors might persist even in modern regulatory regimes like Holland, and corroborates the excellent Erikson/Wlezien paper. Leaving aside the question of significance, Erikson and Wlezien have apparently found a market inefficiency, but since markets can take this into account (they are a &#8220-meta forecasting tool&#8220-), we should expect it to dissipate over time.

Read the previous blog posts by Chris F. Masse:

  • Bzzzzzzzzz…
  • Bzzzzzzzzz…
  • “No offense, but I think Radley Balko is the most valuable blogger in America right now.”
  • Are you a better predictor than John McCain?
  • What does climate scientist James Annan think of InTrade’s global warming prediction markets?
  • Inkling Markets, one year later
  • One trader’s view on BetFair’s new bet-matching logic

The future of futurism: crowds or entrepreneurs?

Posted on by
Reply

No Gravatar

Chris Masse has already linked to The Economist story on futurists, which ends with a plug for prediction markets:

The most heeded futurists these days are not individuals, but prediction markets, where the informed guesswork of many is consolidated into hard probability. Will Osama bin Laden be caught in 2008? Only a 15% chance, said Newsfutures in mid-October 2007. Would Iran have nuclear weapons by January 1st 2008? Only a 6.6% chance, said Inkling Markets. Will George Bush pardon Lewis “Scooter” Libby? A better-than-40% chance, said Intrade. There may even be a prediction market somewhere taking bets on immortality. But beware: long- and short-sellers alike will find it hard to collect.

Like Chris, I&#8217-m partial to the plug for prediction markets, but the story from the past year that best fits the five pieces of advice to futurists in the article (think small, think short-term, admit uncertainty, embed in an industry, and listen more) was not about the &#8220-wisdom of crowds.&#8221- Rather, this profile by Michael Lewis of hedge fund entrepreneur/insurance risk modeler John Seo in the NYT Magazine seems to fit the bill.

[NOTE: This post is a somewhat revised version of a posting on Knowledge Problem: What will futurists do in the future? Chris has also already linked to the story on John Seo that was published in August 2007.]

In a truly efficient prediction market, the price will come to reflect the influence of all available information.

Posted on by
Reply

No Gravatar

Justin Wolfers in the Wall Street Journal:

[…] Through this process of different people trading based on their own observations about the race, prediction markets prices come to aggregate disparate pieces of information into a single summary measure of the likelihood of various outcomes. Moreover, if this market operates efficiently, it will appropriately summarize all of this information and the price will become the most statistically accurate forecast of the election outcome. […]

If I may, I would like to jot down some thoughts related to my concept of prediction market journalism.

  1. The explainer on prediction markets is pretty good.
  2. Crappy URL: http://online.wsj.com/article/SB119902559340658043.html?mod=rss_Politics_And_Policy
  3. No way to leave a comment.
  4. WSJ did list (in one of the sidebar boxes) BetFair along with InTrade &#8212-good point.
  5. WSJ didn&#8217-t list NewsFutures and Inkling Markets but listed their own play-money, bots-driven prediction exchange (WSJ Political Market) &#8212-bad point (conflict of interest).
  6. No external links embedded in Justin Wolfers&#8217- text &#8212-there are very good resources listed in the sidebar boxes, though (but the links use JavaScript and are not direct).
  7. No static or dynamic prediction market charts, even though Justin Wolfers spent a good deal of air time analyzing the recent prediction market events &#8212-a concept he formalized with Eric Zitzewitz.
  8. No tips &#8212-&#8221-I can&#8217-t predict what these trends will be […]&#8220-. Sounds like the prediction market approach (declaring that the market is a better forecasting tool than the polls or the experts) kills any anticipation and scenario planning. It shouldn&#8217-t be like that. Prediction market journalism can&#8217-t be only about analyzing the past. More on that in the coming weeks on Midas Oracle &#8212-not in the WSJ.

For all these reasons, I can give more than a straight B to Justin Wolfers&#8217- copy. You can do better than that, prof. :-D

Amateur Journalists (Bloggers) Vs. Professional Journalists (Media) Vs. Wisdom Of Crowds & Collective Intelligence (Wikipedia)

Posted on by
1

No Gravatar

And the wisdom of crowds won, of course. That&#8217-s the conclusion I draw from reading Rogers Cadenhead at WorkBench, who assessed what would be the settlement of the LongBets wager on:

In a Google search of five keywords or phrases representing the top five news stories of 2007, weblogs will rank higher than the New York Times&#8217- Web site.

AGREE
Dave Winer

Stakes
$2,000
($1,000 each)

DISAGREE
Martin Nisenholtz

For Rogers Cadenhead, Dave Winer will win the bet. But he also says that the overall winner is&#8230- WIKIPEDIA.

[…] So Winer wins the bet 3-2, but his premise of blog triumphalism is challenged by the fact that on all five stories, a major U.S. media outlet ranks above the leading weblog in Google search. Also, the results for the top story of the year reflect poorly on both sides. In the five years since the bet was made, a clear winner did emerge, but it was neither blogs nor the Times. Wikipedia, which was only one year old in 2002, ranks higher today on four of the five news stories: 12th for Chinese exports, fifth for oil prices, first for the Iraq war, fourth for the mortgage crisis and first for the Virginia Tech killings. Winer predicted a news environment &#8220-changed so thoroughly that informed people will look to amateurs they trust for the information they want.&#8221- Nisenholtz expected the professional media to remain the authoritative source for &#8220-unbiased, accurate, and coherent&#8221- information. Instead, our most trusted source on the biggest news stories of 2007 is a horde of nameless, faceless amateurs who are not required to prove expertise in the subjects they cover.

So the real winner is Wikipedia &#8212-a news and knowledge aggregator&#8230- using anonymous volunteers. But Wikipedia is only an information aggregator&#8230- it feeds on both media and blogs to gather the facts. Wikipedia is the common denominator of knowledge &#8212-not the primary source of reporting. Just like prediction markets feed on polls and other advanced indicators.

External Link: See a previous assessment of the bet by Jason Kottke.

NEXT: Amateur Experts (Yahoo! Answers) Vs. Wisdom Of Crowds &amp- Collective Intelligence (Wikipedia)

UPDATE: An empty comment from Read &#038- Write Web.