Prediction Markets in the Classroom: Inkling Markets

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hile prediction markets have been in the spotlight this year, they are still unfamiliar to many folks. As one small step towards improving their visibility, along with my colleague James Lemieux I ran a prediction market at the University of Kansas School of Business. The markets ran for three and a half months and almost all traders were undergraduate business majors (you can see the very end stages of the market at: http://kufin400.inklingmarkets.com, username: myfoxkc and password: myfoxkc).

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These markets were quite popular. The 475 traders made over 27,000 transactions in the 139 available markets. As a matter of reference, that is about 200 transactions per market while in Google&#8217-s market this ratio is 260.

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There was a mix of both socially redeeming topics (issues of interest to the Business School such as how many internships the undergrads would get this school year) and others designed to attract interest (politics, sports, entertainment, finance). I was surprised to see that passions&#8211- and trade volume&#8211- ran quite high even in the more serious markets. For example, one contract&#8217-s expiry was based on whether the XM-Sirius merger would be consummated by March. When the DOJ announced its approval at the end of that month, there was only a small price increase. As the comments below suggest, this was not because the traders were asleep at the wheel but rather because they had a good understanding of the regulatory environment.

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Inkling Markets provided the platform for our markets (if you are unfamiliar with Inkling, they have active public markets which you can sample). Inkling&#8217-s software and support is really ideal for classroom markets. There are nice features for both the people running the markets (James and I) as well as for traders (the students).

For the market admin:

– it is a snap to set-up and administer new contracts

– Adam Siegel and Nate Kontny are very responsive to questions, often responding within the hour

For traders:

– an intuitive trade interface, which is accessible even for those without experience with financial markets (though this can be a drawback if you would also like students to become familiar with order books)

– lots of goodies (customizable profile pages, market-specific discussion boards, graphs) leads students to visit the market a lot

– the daily/weekly top traders list encourages participation

I would strongly recommend others give prediction markets in the classroom a try. I found them to be both a great pedagogical tool and also one which the students really, really like. Students learned first hand about the role of information discovery as well as the biases often seen in prediction markets (though I will add it was difficult to illustrate the home town bias given the success of the athletic teams at my school this year). Feel free to get in touch with me if you have questions about how to set-up your own classroom markets.

BetFair is experimenting a phenomenal revenue growth with sports prediction markets, as I am typing this post. Maybe our good friend the pragmatist could look into that, and report his research findings to the CFTC. Im sure hell do. The delicious sound of a red-hot cash register, with the dollars (o

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BetFair’s bet matching process stopped for one full hour on May 7, 2008, and their P.R. people are over-apologizing for it. They are apologizing for the problem, and for their slow response to affected customers &#8212-good move. They are also giving out 10 bundles of ?1,000 each to 10 affected traders chosen at random &#8212-a move I have mixed feelings with.

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OK. Now, the beef.

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General Formula for Equation of Exponential Growth

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During the same period we’ve continually seen record volumes of bets. For example, the value of bets placed on Betfair last week was greater than for any previous week including Cheltenham or Aintree [which are big British horse racing events].

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Three different expontial growth functions

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Australian billionaire James Packer, who owns 50% of BetFair Australia (thru PBL), has quit the Church of Scientology.

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The Sydney Morning Herald:

However, observers suggest Mr Packer&#8217-s expanding casino empire has presented issues difficult to reconcile with Scientologist beliefs. Scientology&#8217-s founder, the science fiction author L. Ron Hubbard, denounced gambling. &#8220-An obsessive gambler is a psychotic just like a drug addict or an alcoholic,&#8221- Hubbard wrote in 1977.

Wikipedia

Old BBC story

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Previous blog posts by Chris F. Masse:

  • Become “friend” with me on Google E-Mail so as to share feed items with me within Google Reader.
  • Nigel Eccles’ flawed “vision” about HubDub shows that he hasn’t any.
  • How does InTrade deal with insider trading?
  • Modern Life
  • “The Beacon” is an excellent blog published by The Independent Institute.
  • The John Edwards Non-Affair… is making Memeorandum (twice), again.
  • Prediction Markets = marketplaces for information trading… and for separating the wheat from the chaff.

Barack Obama will finish off Hillary Clinton by June 15.

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The End

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Lawrence O&#8217-Donnell (a leftist journalist &#8211-but a good one, whom I appreciate):

A senior campaign official and Clinton confidante has told me that there will be a Democratic nominee by June 15. […] Yes, Clinton spokespersons publicly seem to be lost on gravity-free planet Clinton, but privately they know the end is near.

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There&#8217-s a quasi consensus among the political pundits to say that Hillary Clinton will not be the Democratic nominee in November 2008.

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Tim Russert:

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That was Wednesday night. I have just watched NBC Nightly News this Thursday, and the same Tim Russert appeared with 2 white boards full of calculations, which all pointed to Hillary Clinton being toasted.

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My general thoughts about the place of the political prediction markets in this primary election season:

  1. The weight of the political prediction markets in the US political scenery is close to epsilon. I have been monitoring Memeorandum (the Web&#8217-s best political news and opinion aggregator), and it has never featured one piece of political prediction market journalism &#8212-not only that, but none of the popular popular pieces, featured by Memeorandum, has ever mentioned the political prediction markets and their probabilities. The people who breathe politics on a daily basis (the experts and the bloggers) don&#8217-t give the first fig about the prediction markets. They couldn&#8217-t care less.
  2. The prediction market luminaries who predicted that the prediction markets were to become a tool used in political campaigns were dead wrong. I have never read that campaign staffers use actively the political prediction markets. Campaigns use private polls, only.
  3. Like in 2004 (when Howard Dean was crowned, early on), the prediction markets, at the start of the primary season, were incapable of foreseeing who would be each party&#8217-s nominee, ultimately &#8212-Barack Obama and John McCain both came out of the blue. But the polls and the political experts didn&#8217-t see them, too.
  4. Nothing surprising in that. While the idiots emphasize the supposed magical power of the prediction markets (using adjectives such as &#8220-fascinating&#8221- or &#8220-intriguing&#8221- when writing about them), the well informed people know for a fact that they simply aggregate information from the primary, advanced indicators and the opinions expressed by the political experts. Nothing more than that. The prediction markets are incapable of foretelling upsets, by essence.
  5. The last weeks were particularly interesting, in that regard, because the Obama-vs-Clinton polls have been of no interest &#8212-only the views of the political experts who could count in terms of delegates and super-delegates were of interest. The political prediction markets on the Democratic side, these last weeks, have been a reflection of the pundits&#8217- calculations.
  6. Outside of our blog, the only person who has aimed at practicing prediction market journalism is Justin Wolfers. He has understood the concept.
  7. I would have my own concept of prediction market journalism, and I don&#8217-t agree with the way he executes, but that&#8217-s a detail. The main thing is that he has gotten the concept. That&#8217-s what is important, and that&#8217-s what makes all the difference between Justin Wolfers and the HubDub bloggers (for instance). The concept. The concept. The concept. The idea is to center the narrative around the inputs given by the relevant prediction market(s) &#8212-not just gluing artificially news bits and a prediction market chart (or a link to a prediction market).
  8. InTrade, BetFair and NewsFutures are, in my view, the 3 prediction exchanges that matter for prediction market journalism &#8212-as of now.

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Now, the charts of the expired prediction markets &#8212-starting with Pennsylvania (of 2 weeks ago):

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Yesterday&#8217-s North Carolina:

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Yesterday&#8217-s Indiana:

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Sources: InTrade &amp- BetFair

(Go there for the remaining primaries and caucuses. I don&#8217-t put them on, here, because they don&#8217-t matter anymore.)

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Now, the charts of the prediction markets, going forward:

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2008 US Presidential Election Winner – Individual

Price for 2008 Presidential Election Winner (Individual) at intrade.com

Price for 2008 Presidential Election Winner (Individual) at intrade.com

Price for 2008 Presidential Election Winner (Individual) at intrade.com

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2008 US Presidential Elections

Source: Dynamic, compound prediction market charts from InTrade

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Next US President

Next US President

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Winning Party

Winning Party

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Female President?

Female President?

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Democratic Candidate

Democratic Candidate

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Republican Candidate

Republican Candidate

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Source: BetFair Politics Zone

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Barack Obama to win the Democratic nomination


© NewsFutures

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Hillary Clinton to win the Democratic nomination


© NewsFutures

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Next US President Will Be Democratic.


© NewsFutures

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Next US President Will Be Republican.


© NewsFutures

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Explainer On Prediction Markets

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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 the advanced indicators (i.e., the primary sources of information). 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 6 times out of 10, the favored outcome will occur- and 4 times out of 10, 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.

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More Info:

– The Best Resources On Prediction Markets = The Best External Web Links + The Best Midas Oracle Posts

– Prediction Market Science

– The Midas Oracle Explainers On Prediction Markets

– All The Midas Oracle Explainers On Prediction Markets

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Previous blog posts by Chris F. Masse:

  • Prediction Markets
  • Meet professor Justin Wolfers.
  • Become “friend” with me on Google E-Mail so as to share feed items with me within Google Reader.
  • Nigel Eccles’ flawed “vision” about HubDub shows that he hasn’t any.
  • How does InTrade deal with insider trading?
  • Modern Life
  • “The Beacon” is an excellent blog published by The Independent Institute.

Final InTrade v. Zogby Showdown Results

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Superdelegate chicanery notwithstanding, Obama has won his party&#8217-s nomination, so my head-to-head contest between a major pollster (Zogby) and major prediction market (Intrade) will be coming to a close.

Unsurprising to those who know a little bit about the scholarship, economics, and/or track record of prediction markets, the traders of Intrade provided us much better data this election season than the respondents to the Zogby polls.

Standings
WinsLossesTiesPctContenderAvg Eve Prob
731159.5%Intrade71.3%
371140.5%Zogby40.7%

Schedule
ScoreDateStatePartyIntradeZogbyWinnerIntrade PctZogby Pct
7-3-116-MayINDemClinton2-way-tieClinton85%42%
6-3-116-MayNCDemObamaObamaObama90%50%
6-3-1022-AprPADemClintonClintonClinton82%47%
6-3-94-MarOHDemClinton2-way-tieClinton70%45%
5-3-94-MarTXDemObama2-way-tieClinton57%44%
5-2-95-FebNJRepMcCainMcCainMcCain96%52%
5-2-85-FebNJDemClinton2-way-tieClinton67%43%
4-2-85-FebNYRepMcCainMcCainMcCain98%53%
4-2-75-FebGADemObamaObamaObama96%48%
4-2-65-FebMODemObamaObamaObama63%47%
4-2-55-FebCARepMcCainRomneyMcCain56%40%
3-2-55-FebCADemObamaObamaClinton52%46%
3-2-429-JanFLRepMcCain2-way-tieMcCain51%33%
2-2-426-JanSCDemObamaObamaObama90%38%
2-2-319-JanSCRepMcCainMcCainMcCain56%29%
2-2-219-JanNVDemObamaClintonClinton54%42%
2-1-215-JanMIRepMcCain2-way tieRomney54%27%
2-0-28-JanNHDemObamaObamaClinton91%39%
2-0-18-JanNHRepMcCainMcCainMcCain82%34%
2-0-03-JanIADemObama3-way tieObama54%28%
1-0-03-JanIARepHuckabee2-way tieHuckabee53%28%

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Lord willing, I will have another showdown season, but will most likely choose another pollster. Whereas Intrade listed contracts and probabilities for every state primary, Zogby only provided election eve updates for only 21 of the 87 held to date. Rasmussen stands out as a worthy pollster, but I would be happy with any candidate referrals from my readers as well.

Cross-posted from Caveat Bettor.

Previous blog posts by Caveat Bettor:

  • Land-Ocean year-to-date temperatures 0.35 Celsius over baseline
  • Intrade lists Global Warming Contracts!
  • Intrade beats Zogby on Super Tuesday
  • Super Tuesday Showdown: Intrade v. Zogby
  • The Democrat SC Showdown: Intrade v. Zogby
  • Zogby beats Intrade in predicting Nevada caucus winner Clinton.
  • The GOP SC and Dem NV Showdown: Intrade v. Zogby

Innovation Mechanism = Voting Mechanism + Prediction Market Mechanism

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Xpree&#8217-s Mat Fogarty (responding to Jed Christiansen, even though Jed didn&#8217-t talk to him but to Emile Servan-Schreiber :-D &#8212-argh, kids, today, interrupting adults&#8217- conversations :-D ):

We have had success combining voting to rank the ideas, then prediction markets to analyze the potential of the top ranked ideas. The phrasing in the prediction market needs to be quite specific, if we invested in idea A, how long would it take to get to market? how much would we sell in the first year? If the company does not invest in idea A, then the money bet in the market is returned to the user.

With long development cycles this can be challenging as it requires keeping the market active until ship, or for the sales estimate, one year after ship.

Of course, you could use a preference market – but this has issues of information cascades and rewarding of group think.

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Xpree

Here&#8217-s the Xpree stuff which Mat is talking about.

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Previous blog posts by Chris F. Masse:

  • Since YooPick opened their door, Midas Oracle has been getting, daily, 2 or 3 dozens referrals from FaceBook.
  • US presidential hopeful John McCain hates the Midas Oracle bloggers.
  • If you have tried to contact Chris Masse thru the Midas Oracle Contact Form, I’m terribly sorry to inform you that your message was not delivered to the recipient.
  • THE CFTC’s SECRET AGENDA —UNVEILED.
  • “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.”
  • Meet professor Thomas W. Malone (on the right), from the MIT’s Center for Collective Intelligence.
  • Tom W. Bell rebuts the puritan and sterile petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, the bright masterminder of the Iraq war).

BetFair-TradeFair and the National Security Agency (among others) are giving away $260,000 in tournament prizes to attract the worlds best nerdy geeks (who cant fry an egg, cant get a Friday night date, but can decipher a computer algorithm).

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The 2008 TopCoder Open @ Las Vegas, Nevada, U.S.A. – 2008-05-11~15

BetFair Corporate – Jobs &amp- Careers

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Previous blog posts by Chris F. Masse:

  • A second look at HedgeStreet’s comment to the CFTC about “event markets”
  • Since YooPick opened their door, Midas Oracle has been getting, daily, 2 or 3 dozens referrals from FaceBook.
  • US presidential hopeful John McCain hates the Midas Oracle bloggers.
  • If you have tried to contact Chris Masse thru the Midas Oracle Contact Form, I’m terribly sorry to inform you that your message was not delivered to the recipient.
  • THE CFTC’s SECRET AGENDA —UNVEILED.
  • “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.”
  • Meet professor Thomas W. Malone (on the right), from the MIT’s Center for Collective Intelligence.

Insider Trading and Private Prediction Markets

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People who run in-house, corporate prediction markets have told me that U.S. laws against illegal insider trading give them nightmares. The problem arises because a private prediction market typically generates material nonpublic information about the corporation that hosts it. If somebody misuses that information to time the purchase or sale of the corporation&#8217-s stock, liability for illegal insider trading could follow.

I plan to say a great deal more about this problem, and some proposed cures, in a paper I&#8217-m writing for the Journal of Prediction Markets. In very brief, I propose several strategies that should help to mitigate the risks that private prediction markets create under illegal insider trading laws:

  • Segregate markets for traditional insiders from other markets.
  • Broaden safeguards against illegal insider trading to reach beyond traditional insiders.
  • Treat the market&#8217-s claims and prices as trade secrets.
  • Set up decoy claims and prices.

Alternatively, of course, a corporation could simply make public the claims and prices of its in-house prediction market. Illegal insider trading laws only speak to material nonpublic information, after all. It seems very unlikely that any corporation would willing disclose so much and such probative information about its management, however.

[Crossposted at Agoraphilia and Midas Oracle.]

Previous blog posts by Tom W. Bell:

  • Let’s Tell the CFTC Where to Go.
  • Let Prediction Markets Fight Terrorism.
  • Protecting Private Prediction Markets
  • Building Exits into CFTC Regulation
  • Getting from Collective Intelligence to Collective Action
  • Quake Markets
  • Presentation of Private Prediction Markets’ Legality Under U.S. Law

Bet America = Web-based betting on US horse racing

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Via Simon Skinner&#8217-s comment, here&#8230-

Bet America:

BetAmerica.com is an online race wagering service of Lien Games Racing LLC, in association with Horse Race North Dakota, the licensed operator of North Dakota Horse Park. Licensed, based and regulated in the U.S., it offers Advance Deposit Wagering on pari-mutuel horse racing by means of the internet, from a U.S. licensed and regulated company based in North Dakota. We have a proven track record of processing hundreds of millions of dollars in wagers on horse and dog racing. And now we&#8217-re making it even easier to wager with our new internet service.

BetAmerica.com offers Thoroughbred, Quarter Horse and Harness wagering content from racetracks across the globe. We make it easy to sign up and be wagering in minutes. We never impose any fees or charges to join, to wager or to watch racing video.

All BetAmerica.com wagers are securely commingled into host track betting pools. All winning wagers are paid at full track odds. Members will have access to instantaneous wagering and bet verification, live audio race calls, dual, multiple-sized live video screens, and live up to date track odds.

BetAmerica.com also offers a 3% cash reward bonus on every wager made on all of the BetAmerica Bonus Tracks. The BetAmerica Bonus Tracks have allowed BetAmerica to promote their tracks by rewarding players for their play.

We&#8217-ll be adding to our website over the coming months and welcome your suggestions for how we can serve you better. So join us, have fun, and good luck at the races!

The BetAmerica.com Team

FAQ:

Who is Bet America?
Bet America is part of Lien Games, a North Dakota land based horse racing company that is licensed and regulated in the United States.

Is it legal to wager in the United States?
Bet America is part of Lien Games, a legal, licensed and regulated company located in the United States. Bet America is in full compliance with all applicable United States and Federal laws.

For a list of state imposed wagering restrictions, please click here.

How do I open an account with Bet America?
Simply go to our SIGN UP NOW page.

What information do I need to provide to open up an account?
You will need to provide your name, social security number, email and residential information.

How long does it take to open an account?
You can be up and wagering within minutes of SIGNING UP.

How much does it cost to become a member of Bet America?
There are no costs to become a member!

Are there any age restrictions to become a member of Bet America?
Yes, only players who are 21 years of age or older may open up an account with Bet America

What tracks are available for wagering on at Bet America?
Most of the top tracks in North America are available for wagering on. Please check our TRACKS page for a complete list of available tracks.

How do I deposit funds into my account?
Once you have signed up, go to our DEPOST page under the ACCOUNT tab and then choose the method of deposit. Bet America offers many convenient ways to deposit funds. Choose your deposit method and then follow the steps in order to fund your account. Please note, all deposits and withdrawls at BetAmerica.com are in US dollars.

How are wagers placed?
Wagers can be placed right up until post time. Wagers are then sent from Bet America into the pari-mutuel wagering pools for the given track. Wagers are then commingled and winners are paid full track odds.

What types of wagers are offered?
Our wagering menu will be virtually identical to the menu provided at the given track.

Are transactions confidential?
Yes, all wagers are confidential.

When will my winnings appear in my account?
Your winning wagers will appear in your account within a few minutes of the official race results being posted at the track.

Is it possible to cancel a wager?
Once a wager is submitted, you may not cancel it.

Can I see a record of my wagers?
Yes, you can see a complete record of your wagers by going to our WAGER HISTORY page.

What happens when a horse that has been scratched is part of my wager?
Depending on the track, your scratched selection may be replaced with the post time favorite or wager refunded. In the event that a track refunds any portion of your wager, it will be immediately reflected in your wagering account.

Are winners paid full track odds?
Yes, winners are paid full track odds on all wagers.

How do I make a withdrawal from my account?
Once you have signed up, to make a withdrawal from your account, go to our WITHDRAW FUNDS page and complete the required steps to withdraw your funds. Please note, all deposits and withdrawls at BetAmerica.com are in US dollars.

If there is a problem with my account, who do I contact?
If you have any problems with your wagering account, please contact our customer support team via our CONTACT page.

What information is Bet America required by law to give to the IRS concerning account activity?
By federal law, any wager which results in proceeds of $600.00 or more must be reported to the Internal Revenue Service (IRS), if the amount of such proceeds is at least 300 times as large as the amount wagered. Any wager which results in proceeds of more than $5000.00 is subject to withholding, if the amount of such proceeds is at least 300 times as large as the amount wagered.

Is my personal account information secure?
All personal account information is strictly confidential.

How can I watch the live races?
Click on the VIDEO link at the top of the page and then choose video 1 or video 2 to display the video pop up window. Then select the track you wish to view. You can watch 2 tracks simultaneously.

Previous blog posts by Chris F. Masse:

  • 24 hours after the launch of the “Prediction Markets” group at LinkedIn, we have already 39 members —both prediction market luminaries and simple people (trading the event derivatives or collecting the market-generated probabilities).
  • That was ubber world star Barack Obama in Berlin, during his July 2008 speech at the Victory Column. Spot all the digital cameras pointing to the socialist Messiah. Snatching something to bring at home — “see, I was there”.
  • If you want your affiliation with the “Prediction Markets” group to appear on your LinkedIn profile, then click on “Edit Public Profile Settings”, and check the “Groups” option.
  • If you want to connect with InTrade CEO John Delaney on LinkedIn…
  • Do join the “Prediction Markets” group at LinkedIn, if you have a strong interest in the prediction markets or if you work in the prediction market industry. It’s free, and that’s a way for the LinkedIn visitors browsing stuff about p
    rediction markets to stumble upon your resume / profile.
  • You can now join the LinkedIn group on Prediction Markets.
  • Nigel Eccles says that HubDub generates “data on peoples’ reputations for accurately analyzing and forecasting future events”.