The best research papers on prediction markets

Posted on by
Reply

No Gravatar

As seen by Andreas Graefe&#8230-

IIF’s SIG on Prediction Markets

Research Papers

Basics

Several studies explain the concept of prediction markets and provide useful summaries of the method, e.g.

– Spann, M. &amp- Skiera, B. (2003). Internet-based Virtual Stock Markets for Business Forecasting, Management Science, 49, 1310-1326. [Full text]
– Wolfers, J. &amp- Zitzewitz, E. (2006). Prediction Markets in Theory and Practice, New Palgrave Dictionary of Economics and the Law (in press). [Full text]
– Wolfers, J. &amp- Zitzewitz, E. (2004). Prediction Markets, Journal of Economic Perspectives, 18, 107-126. [Full text]
– An overview and classification of 152 studies on prediction markets, published between 1991 and 2006, is provided by
Tziralis, G. &amp- Tatsiopoulos (2007). Prediction Markets: An Extended Literature Review, Journal of Prediction Markets, 1, 75-91. [Full text]

Evidence on the accuracy of prediction markets

This section summarizes research that analyzes the relative performance of prediction markets and other forecasting methods.

Markets vs. polls (election forecasting)

– Berg, J., Nelson, F. &amp- Rietz, T. (2008). Prediction Market Accuracy in the Long Run, International Journal of Forecasting, 24, 283-298. [full text]
– Erikson R. S. &amp- Wlezien C. (2007). Are Political Markets Really Superior to Polls as Election Predictors? Public Opinion Quarterly, forthcoming. [full text]
– Stix, G. (2008): When Markets Beat the Polls, Scientific American Magazine, March 2008. [Abstract]

Markets vs. unaided experts and groups

– Pennock, D. M., Lawrence, S., Giles, C.L. &amp- Nielsen, F.A. (2000). The Power of Play: Efficiency and Forecast Accuracy in Web Market Games, Technical Report 2000-168, NEC Research Institute. [full text]
– For predicting Oscar Award winners, Pennock et al. (2000) compared prices of the Hollywood Stock exchange to expert judgments of five movie columnists. On the day the experts revealed their forecasts, only one of them was better than the market predictions. From the day after, the market outperformed all experts as well as the expert consensus.
– Servan-Schreiber, E. J., Wolfers, J., Pennock, D. M. &amp- Galebach, B. (2004). Prediction Markets: Does Money Matter? Electronic Markets, 14, 243-251. [full text]
– For predicting the results of NFL games, Servan-Schreiber et al. (2004) compared the forecasts of two markets to those of 1,947 self-selected individuals. At the end of the season, the markets ranked 6th and 8th compared to the individuals. The human average – which would be the outcome of a classical survey – ranked 39th.

Markets vs. other forecasting methods

– Chen, K. Y., Plott, C. R. (2002). Information Aggregation Mechanisms: Concept, Design and Implementation for a Sales Forecasting Problem, Social Science Working Paper No.1131, California Institute of Technology, Pasadena. [full text]
– For forecasting sales figures, Chen and Plott (2002) reported on an internal market at Hewlett-Packard that beat the official forecasts of the company in 6 out of 8 events.
– Jones Jr., R. J. (2008). The state of presidential election forecasting – The 2004 experience, International Journal of Forecasting, 24, 308-319. [Abstract]
– Jones (2008) analyzed the forecasts of IEM&#8217-s vote-share market for the 2004 election and compared them to traditional polls, a Delphi expert survey, regression models and a combination of all four approaches, the Pollyvote. He concludes that in comparison with most methods of forecasting the popular vote, the IEM was the superior performer.Spann, M. &amp- Skiera, B. (2003). Internet-based Virtual Stock Markets for Business Forecasting, Management Science, 49, 1310-1326. [Full text]
– Spann and Skiera (2003) compared forecast accuracy of an internal market at a large German mobile phone operator. They found that the market forecasts outperformed were more accurate than four extrapolation models (arithmetic mean, geometric mean, linear trend and exponential trend).

Corporate Markets

– Chen, K.-Y. &amp- Plott, C. R. (2002). Information Aggregation Mechanisms: Concept, Design and Implementation for a Sales Forecasting Problem. Social Science Working Paper No.1131, California Institute of Technology, Pasadena. [Full text]
– Cowgill, B., Wolfers, J. &amp- Zitzewitz, E. (2008). Using prediction markets to Track Information Flows: Evidence from Google, working paper. [Full text]
– Ortner, G. (1997). Forecasting Markets – An Industrial Application: Part I, working paper, TU Vienna. [Full text]
– Spann, M. &amp- Skiera, B. (2003). Internet-based Virtual Stock Markets for Business Forecasting, Management Science, 49, 1310-1326. [Full text]

Decision Markets

– Hanson, R. (1999). Decision Markets, IEEE Intelligent Systems, 14, 16-19.

Manipulation

– [Except] Hansen et al. (1998), most empirical studies report that manipulative attacks on result accuracy have not been successful historically (Rhode and Strumpf 2006), in the laboratory (Hanson et al. 2006), and in the field (Camerer 1998).
– Camerer, C. (1998): Can Asset Markets Be Manipulated? A Field Experiment with Racetrack Betting, Journal of Political Economy, 106(3), 457-482. [Abstract]
– Hansen, J., Schmidt, C. &amp- Strobel, M. (2004). Manipulation in Political Stock Markets – Preconditions and Evidence, Applied Economics Letters, 11, 459-463. [Abstract]
– Hanson, R., Oprea, R. &amp- Porter, D. (2006). Information Aggregation and Manipulation in an Experimental Market, Journal of Economic Behavior &amp- Organization, 60, 449-459. [full text]
– Rhode, P. W., and Strumpf, K. S. (2006). Manipulating Political Stock Markets: A Field Experiment and a Century of Observational Data, Working Paper, University of North Carolina(2006). [full text]

–

More research papers on prediction markets

–

IIFs SIG on Prediction Markets

Posted on by
1

No Gravatar

http://www.marketsforforecasting.com/ now redirects to:

http://www.forecastingprinciples.com/PM/

–

I have listed Andreas Graefe&#8217-s sub-website everywhere &#8212-and I have also put the link here, at the bottom of our blog sidebar.

(I&#8217-m too good, I know. :-D )

Best wishes to him.

–

Previous blog posts by Chris F. Masse:

  • The best research papers on prediction markets
  • 2008 Electoral Map
  • American Enterprise Institute’s Center For Regulatory And Market Studies (Policy Markets)
  • Science
  • Why did prediction markets do well in the pre-polling era, professor Strumpf?
  • Mozilla FireFox users, do you have trouble downloading academic papers (as PDF files) from SSRN?
  • “Impact Matrix. Used to collect and gauge the likelihood and business impact of various events in the very long term.”

Why did prediction markets do well in the pre-polling era, professor Strumpf?

Posted on by
Reply

No Gravatar

Koleman Stumpf

Previous blog posts by Chris F. Masse:

  • The best research papers on prediction markets
  • 2008 Electoral Map
  • American Enterprise Institute’s Center For Regulatory And Market Studies (Policy Markets)
  • IIF’s SIG on Prediction Markets
  • Science
  • Mozilla FireFox users, do you have trouble downloading academic papers (as PDF files) from SSRN?
  • “Impact Matrix. Used to collect and gauge the likelihood and business impact of various events in the very long term.”

Predictify is about building track records of human predictors.

Posted on by
Reply

No Gravatar

Robert Scoble interviews their CTO.

Video

–

–

Predictify is not a prediction exchange. We think prediction markets are superior to polls and surveys, don&#8217-t we? :-D

With Predictify, the mechanism delivering the collective verdict is simplistic: it&#8217-s a poll &#8212-with possibility to get down to each individual answer.

Their conversation is very interesting, nevertheless &#8212-in great part due to Robert Scoble&#8217-s intense curiosity.

Technically, the video is awesome and plays well &#8212-even with my old computer and slow DSL line. Kudos to the Fast Company techies. :-D

UPDATE: I don&#8217-t like that their video starts off automatically, though. With YouTube, we decide to play the video &#8212-it is not imposed on us.

UPDATE: Alas, their embedded video does not go into the blog feed. :(

–

UPDATE: I e-mailed my remarks to Robert Scoble, and he&#8217-s asked to his techie to look into the issues. :-D

–

UPDATE: I see that the video does not start on its own, now. They managed to correct that. :-D Rest the fact that their videos don&#8217-t go into feeds.

–

Impact Matrix. Used to collect and gauge the likelihood and business impact of various events in the very long term.

Posted on by
Reply

No Gravatar

My republishing of the brand-new NewsFutures explainer was the most popular Midas Oracle story this morning.

The sentence in the title was the most talked about. Many Deep Throats offered me their conjectures. Emile is quite a smart man.

–

Previous blog posts by Chris F. Masse:

  • The best research papers on prediction markets
  • 2008 Electoral Map
  • American Enterprise Institute’s Center For Regulatory And Market Studies (Policy Markets)
  • IIF’s SIG on Prediction Markets
  • Science
  • Why did prediction markets do well in the pre-polling era, professor Strumpf?
  • Mozilla FireFox users, do you have trouble downloading academic papers (as PDF files) from SSRN?

John Delaney and Mark Davies P.R. tactics suck.

Posted on by
Reply

No Gravatar

The P.R. industry sucks.

It also true for the field of prediction markets. InTrade-TradeSports and BetFair-TradeFair should embrace open blogging.

–

Previous blog posts by Chris F. Masse:

  • Kudos to BetFair’s e-mail marketing team?
  • Conditional prediction markets about oil price and SegWay sales… Like the idea, Robin Hanson?
  • Justin Wolfers [*] is the most cited prediction market economist
  • The Orb @ Texas Tech University
  • IS IT SAFE TO LOCATE A PREDICTION EXCHANGE NEAR A RIVER???
  • RIVER RISING. POWER PLANT CLOSED. IOWA ELECTRONIC MARKETS AT RISK? DEVELOPING…
  • U.S. COAST GUARDS DEPLOYED TO SAVE THE IOWA ELECTRONIC MARKETS

So far, the Prediction Market Industry Association (PMIA) is a shallow organization run by a bunch of delirium-tremens incompetents. – It sounds too European, too French. – Yeah, its too French. – All words and no actions. – Hot air in a golden-painted balloon ready to burst.

Posted on by
3

No Gravatar

Prediction Market Industry Association&#8217-s goals as stated last year:

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.

–

Reality Check:

  1. Null. No central database. The idea sucks, anyway. As for the &#8220-standard&#8221- prediction markets (a good idea, that one), only InTrade and Reality Markets participate. (NewsFutures is AWOL, even though their CEO heads the PMIA.)
  2. Null. The only resources listing both &#8220-members&#8221- and &#8220-core readings&#8221- of the field of prediction markets is CFM &#8212-as of today.
  3. Null. The best &#8220-venues&#8221- for live discussions on prediction markets are: Koleman Strumpf&#8217-s conference(s), the ACM WorkShops on Prediction Markets, Tim O&#8217-Reilly&#8217-s conferences (Tech:Money, CI Foo Camp, etc.), and the FIA&#8217-s conferences. The other conferences are payola conferences set up by mediocre individuals or organizations who really don&#8217-t care about prediction markets &#8212-but want to make a quick buck riding the prediction market hype.
  4. Null. I&#8217-m more interested in iMEGA and RGA.

–

And the PMIA does not get the key individuals: Adam Siegel and Nigel Eccles &#8212-to drop only 2 names.

The Prediction Market Industry Association is an ambulatory joke, so far.

–

UPDATE: Deep Throat agrees with me. :-D

–

The best presentations from the worlds best conference on enterprise prediction markets -ever

Posted on by
Reply

No Gravatar

Awesome slides in bold.

Brought to you by Koleman Strumpf (circa November 2007):

–

Henry Berg, Microsoft &lt-slides&gt-
Discussant: Robin Hanson (George Mason Department of Economics) &lt-slides&gt-
–
Christina Ann LaComb, GE (The Imagination Market- abstract is free, text is gated) &lt-slides&gt-
Discussant: Marco Ottaviani (Kellogg School of Management, Management and Strategy) &lt-slides&gt-
–
Dawn Keller, Best Buy (Best Buy’s TAGTRADE Market) &lt-slides&gt-
–
Bo Cowgill, Google (Putting Crowd Wisdom to Work) &lt-slides&gt-
–
Jim Lavoie, Co-Founder and CEO, Rite-Solutions &lt-slides&gt-
–
David Perry, Co-Founder and President, Consensus Point &lt-slides&gt-
–
Mat Fogarty, Founder and CEO, Xpree Inc &lt-slides&gt-

–

Tom W. Bell, Chapman University School of Law &lt-slides&gt-

–

How to run enterprise prediction markets… legally

Posted on by
1

No Gravatar

Private Prediction Markets and the Law – (PDF file) – by Tom W. Bell – 2008-05-18

Abstract

This paper analyses the legality of private prediction markets under U.S. law, describing both the legal risks they raise and how to manage those risks. As the label &#8220-private&#8221- suggests, such markets offer trading not to the public but rather only to members of a particular firm. The use of private prediction markets has grown in recent years because they can efficiently collect and quantify information that firms find useful in making management decisions. Along with that considerable benefit, however, comes a particularly worrisome cost: the risk that running a private prediction market might violate U.S. state or federal laws. The ends and means of private prediction markets differ materially from those of futures, securities, or gambling markets. Laws written for those latter three institutions nonetheless threaten to limit or even outlaw private prediction markets, as the paper details. The paper also details, however, how certain legal strategies can protect private prediction markets from violating U.S. laws or suffering crushing regulatory burdens. The paper concludes with a legal forecast, describing the likely form of potential CFTC regulations and a strategy designed to ensure the success of private prediction markets under U.S. law.

Conclusion

This paper has described the legal risks facing private prediction markets under U.S. law and how firms that want to runs such markets should respond. To minimize the risk of CFTC regulation, firms should institute mechanisms to ensure that their private prediction markets do not support significant hedging functions and make clear, both in the documentation supporting their markets and in their markets&#8217- structures, that they offer trading not in binary option contracts but rather in conditional negotiable notes. Publicly-traded firms subject to U.S. law can minimize the risks of illegal insider trading by either making public all prices and claims traded on their prediction market or by:
• Keeping trading by traditional insiders separate from trading by others-
• Broadening safeguards against illegal insider trading to cover all traders-
• Treating the market&#8217-s claims and prices as trade secrets- and
• Seeding the market with decoy claims and prices.

Although the skill-based trading emphasized on private prediction markets should in theory remove them from the scope of gambling regulations, a prudent firm could help to ensure that result by:
• Forbidding traders from investing their own funds in the market- and
• Requiring its agents to participate in its market.

As should perhaps go without saying (but as hereby will not), any firm implementing these legal strategies should back them up with ample record-keeping. Each person who trades on a firm&#8217-s market should, for instance, receive clear notification that the market does not deal in CFTC- or SEC-regulated instruments, and that it does not offering services subject to oversight by any state gambling commission. Better yet, traders should be required to access the market only through a click-through agreement in which, among other things, they consent to that stipulation. So go only a few of the provisions that ought to appear in such an agreement- any reasonably competent attorney will think of many worthwhile provisions to add.

Private prediction markets will almost certainly escape the legal uncertainty that now clouds their prospects in the U.S. Even if no legislator, judge, or regulator ever notices them, private prediction markets will come to win de facto legality simply by merit of their widespread use and acceptance. With reflection —perhaps aided by papers such as this one— and practical experience, attorneys will learn how to structure private prediction markets to accommodate the laws that rightfully apply to them and to dodge the effect of laws written for other, materially different markets. There remains some risk, granted, that the CFTC will crush private prediction markets under new regulations. With luck though —and perhaps also with some persuasion— the CFTC will instead allow prediction markets to choose from among several different tiers of regulations. And even in the worse-case scenario, private prediction markets will not disappear- they will simply flee the U.S. for other, freer homes.