Do you see a sixth dimension to the prediction markets?

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Midas Oracle is about the event derivative markets and:

  1. their profit opportunities (sought by the traders)-
  2. their predictive power (investigated by the economists)-
  3. their entertainment ability (delivered by the play-money prediction markets)-
  4. their hedging utility (employed by the risk managers and monitored by the CFTC)-
  5. their decision-making capacity (alleged by Robin Hanson).

E-mail me or leave a comment below.

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UPDATE: Xpree&#8217-s Mat Fogarty&#8230-

their training / motivational ability (corporations like their employees to be engaged and knowledgeable about key metrics – PMs reward this process)

Reading the Markets – Forecasting Prediction Markets By News Content Analysis

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Reading the Markets – Forecasting Prediction Markets By News Content Analysis – (PDF file) – by Ari Gilder and Kevin Lerman – 2007-xx-xx

Abstract

We present a system for predicting price fluctuations in Prediction Markets, such as TradeSports and the Iowa Electronic Markets. Our approach utilizes both market history and public news articles, published before the beginning of trading each day, to produce a set of recommended investment actions. Since there is evidence that prediction markets are very good indicators of future events, we hypothesize that the converse is true: past/present events can potentially assist in predicting future prices in these markets. We empirically show that these markets are surprisingly predictable, even by purely market-historical techniques. Furthermore, analyzing relevant news articles captures information independent of the market’s history, and combining the two methods significantly improves results. Capturing this signal from news articles requires some linguistic sophistication – the standard naive bag-of-words approach does not yield predictive features. Instead, we use part-of-speech tagging, dependency parsing and semantic role labeling to generate features that improve system accuracy.

We evaluate our system on eight political markets from 2004 and show that we can make effective investment decisions based on our system’s predictions, whose profits greatly exceed those generated by a baseline system. Additionally, our market prediction system can be applied to any Prediction Market with a known end date and for which a set of relevant entities (people, places, or things) can be defined.

Previously: Today&#8217-s prediction markets are far from being efficient.

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:

  • Car manufacturer Renault (Nissan’s twin) is now a NewsFutures client.
  • Nokia’s Enterprise Prediction Markets = Competitive Advantage
  • Comments are now completely open on Midas Oracle.
  • Albert Einstein, Chairman of the Midas Oracle Advisory Board
  • Erratic –but not Stochastic– Charts
  • Barack Obama is the 44th US president.
  • We already have prediction markets in future tax rates. It’s called the municipal bond yield curve.

MENTAL HEALTH EXPERTS: INKLING HOBBY IS GOOD FOR ENERGY ECONOMIST MICHAEL GIBERSON.

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The New York Times:

Carol Kauffman, an assistant clinical professor at Harvard Medical School: &#8220-When you’re really engaged in a hobby you love, you lose your sense of time and enter what’s called a flow state, and that restores your mind and energy.&#8221- [&#8230-] &#8220-That positive emotion builds your cognitive and social skills. If you follow your bliss [*] for a little while, it really gives you a surge of energy.&#8221-

Dr. Gabriela Cora, a psychiatrist who is managing partner of the Florida Neuroscience Center and president of Executive Health and Wealth Institute: &#8220-Making time for enjoyable activities stimulates parts of the brain associated with creative and positive thinking. You become emotionally and intellectually more motivated.&#8221-

Gail McMeekin, a psychotherapist and owner of Creative Success: &#8220-Any time you take a break from routine, you develop new ways of thinking&#8221-.[&#8230-] &#8220-You have to do some market research first and make sure you could earn a living doing your hobby. You also take the risk that making your hobby your career [*] will take all the fun out of it.&#8221-

[*] His &#8220-bliss&#8221- right now is to chronicle the Writers Guild America&#8217-s 2007 strike on Inkling Markets and Midas Oracle .COM.

[**] Told him 10 times!!!!!!!

Michael Giberson

RECOMMENDED READING: RGGI auction design flaw: Separate sealed-bid auctions for substitute goods poses needless risks for bidders – by Michael Giberson (at Knowledge Problem)

&#8220-RGGI&#8221- is short for the Regional Greenhouse Gas Initiative (North East and Mid-Atlantic). They want to create a multi-state cap-and-trade program with a market-based emissions trading system. Economist Michael Giberson has found [links to Crampton&#8217-s paper that highlights] &#8220-one serious flaw that threatens the efficiency of the auction: they proposed to auction two goods which are asymmetric substitutes in separate, simultaneous sealed bid auctions.&#8221-

Mike, are there lessons here to learn when it comes to prediction market designs?

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Psstt&#8230- The best sentence that Mike has ever told me is this one (from memory):

Maybe there&#8217-s a method in your madness.

:-D

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

  • Hot-Linking InTrade’s Advanced Charts
  • Prediction Markets on FaceBook
  • BetFair SP = BetFair Starting Price
  • Gary Flake to David Pennock: Come on board… or die.
  • Technology Futurism
  • Trade on BetFair-TradeFair as you would trade on TradeSports-InTrade, thanks to order-entry software BinarySoft.
  • Pervez Musharraf prediction markets –Eric Zitzewitz Edition

Risk premia creeping higher

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Since Halloween, financial markets seem to be getting spooked again.

Larry Kudlow writes:

Until recently, I thought the Fed could stand pat at their December 11th meeting. However, I have completely changed my mind in light of the continuing credit market turbulence.

Kudlow notes that the spread between 30-day asset-backed commercial paper and U.S. Treasuries, which spiked up dramatically after August&#8217-s liquidity events but subsequently eased back down, climbed back up during November to the neighborhood of its previous high.

abcp_dec_07.png

The same is true of the spread between the London interbank offered rate and Treasuries.

libor_dec_07.png

One of the features of the initial financial turmoil on which I commented last August is that it seemed to be confined specifically to the financing of problematic securities, but was not showing up as a broader risk premium in something like the spread between Baa-rated corporate bonds and 10-year Treasuries. But the latter spread has made a significant move up over the last month, and now stands 80 basis points higher than in July.

baa_daily_dec_07.gif

A sharp upward move in the Baa-Treasury spread is often associated with the early stages of an economic downturn, as the following longer-term perspective using monthly data illustrates:

baa_monthly_dec_07.gif

For what it&#8217-s worth, bettors at Intrade also seem to believe that the risk of a U.S. recession during 2008 has crept up since mid-October.

intrade_recession_dec_07.png

Cross-posted from Econbrowser.

PIECE OF EVIDENCE #2 THAT BETFAIR-TRADEFAIR ARE MINDING THE PREDICTION MARKETS.

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TradeFair Binaries:

TradeFair Prediction Markets

Hint: A binary bet represents the probability or percentage likelihood of an event happening. In the example above the price is 66 to sell and 67 to buy. You should buy if you think there is a greater than 67% likelihood of the event happening OR sell if you think the probability is less than 66% likelihood of the event NOT happening.

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Thank you, Eric Zitzewitz and Justin Wolfers (among others).

Interpreting Prediction Market Prices as Probabilities – (PDF – Abstract) – by Justin Wolfers and Eric Zitzewitz – 2005-02-01

While most empirical analysis of prediction markets treats prices of binary options as predictions of the probability of future events, Manski (2004) has recently argued that there is little existing theory supporting this practice. We provide relevant analytic foundations, describing sufficient conditions under which prediction markets prices correspond with mean beliefs. Beyond these specific sufficient conditions, we show that for a broad class of models prediction market prices are usually close to the mean beliefs of traders. The key parameters driving trading behavior in prediction markets are the degree of risk aversion and the distribution on beliefs, and we provide some novel data on the distribution of beliefs in a couple of interesting contexts. We find that prediction markets prices typically provide useful (albeit sometimes biased) estimates of average beliefs about the probability an event occurs.

Previously: BetFair’s Global Warming Prediction Markets — CFM’s Views – Out of their 3 event derivatives on global warming, the first two, at least, are flawed products.

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The BusinessWeek contributing writer has a poor choice of vocabulary.

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No GravatarPallavi Gogoi talks about &#8220-predictive markets&#8221- instead of prediction markets.

How dare. :-D

Previous blog posts by Chris F. Masse:

  • Last year’s best April Fool’s Day Joke had something to do with the Wisdom Of Crowds.
  • Will HedgeStreet USA, the hypothetical InTrade USA, and the hypothetical TradeFair USA, be regulated in the future by a merged SEC+CFTC regulatory structure?
  • WORST THAN ELIOT SPITZER (if it were possible): Formula One boss, Max Mosley, had sado-masochist sex with 5 prostitutes, for 5 hours (!!), reenacting a concentration camp scene (!!) in which he played the role of both Nazi guard and inmate.
  • Is BetFair Poker a booby trap for the gullible novices? Does The Sporting Exchange (the operator of the BetFair brands) help gangs plucking down innocent recreational poker players?? To get an inkling, don’t read The Guardian, seeded by the BetFair spin doctor- read Midas Oracle.
  • The video that the technologically retarded BetFair spin doctor should watch.

Slate publishes a BetFair explainer for the Americans.

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YouBet – The wonders and dangers of online sports wagering. – (page 2) – [BetFair explained to the Americans] – by Slate&#8217-s T.D. Thornton – 2007-11-28

[…] Betfair, which opened for business in 2000, is best described as day trading for sports bettors. Using Web-based accounts, anonymous users can set their own odds or bid on odds offered by other players. Online &#8220-betting exchanges&#8220-—there are dozens, but Betfair is the kingpin, with a 90 percent market share—eliminate the role of odds-setting middlemen like local bookies and Las Vegas sports books. Instead of wagering on take-it-or-leave-it odds set by the house, gamblers are free to choose among many different price points, striking bets for as little as $1 up to hundreds of thousands. […]

On balance, Betfair offers a number of advantages over traditional sports betting. Compared with bookies and casinos, exchanges keep a much smaller cut of the action, a 1 percent to 3 percent &#8220-vig&#8221- that&#8217-s far less than the standard 10 percent. (In the long run, the exchanges are banking on greater betting volume far outpacing the difference in price: Betfair handles 5 million transactions a day, processing more than 300 bets per second.) […]

Exchanges are also unique in that you can lay odds on a team or individual to lose a sporting event. Naysayers believe that betting to lose is, well, unsporting, and that it is an open invitation for corruption and skullduggery. But this argument is idealistic whitewash. Just ask anyone involved in high finance, where betting to lose is an accepted, ethical strategy—on Wall Street, it&#8217-s called short selling. […]

The most clever innovation, however, is in-game gambling. No longer must you stop placing bets once the game begins. In-game wagering lends itself best to slower-paced sports like golf. When the action is much faster, the limits of technology get pushed to ridiculous proportions, with frantic players punching in frenzied bets that have more to do with market timing than sports. […]

If the United States loosened up its regulations, online exchanges would proliferate here. By creating a market-based framework for stateside sports betting, a chaotic gambling scene would, for once, have some order and credibility. […]

#1. This is the most significant news piece about BetFair I have seen in the American media.

#2. You&#8217-ll have noted that the prediction market approach is completely absent from the writer&#8217-s angle. (TradeSports and InTrade are not even cited.) My view is that this betting exchange approach and our prediction market approach are complementary. BetFair should have both.

Slides of presentations from Conference on Corporate Applications of Prediction/Information Markets (1 November), Kansas City

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The speakers&#8217- presentations are now available in pdf format on the conference webpage,

http://people.ku.edu/~cigar/PMConf_2007.

I intend to keep this page in place, so feel free to bookmark it and use it as a resource.

Previous blog posts by Koleman Strumpf:

  • Prediction Markets in the Classroom: Inkling Markets
  • Summary of Conference on Corporate Applications of Prediction/Information Markets (1 November), Kansas City
  • Reminder: Corporate Applications of Prediction Markets Conference (1 November)
  • Conference: Corporate Applications of Prediction/Information Markets (Thursday, 1 November 2007)
  • Copernican Principle: How To Predict the End of the World
  • Win Justin’s Money? (re: Is there manipulation in the Hillary Clinton Intrade market? Redux.)
  • Is there manipulation in the Hillary Clinton Intrade market?

Betfair may be forced to raise its commission charges.

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The British Horseracing Authority has put a case to the Department of Culture, Media and Sport for a greater contribution from the betting industry in the 47th levy.

Seeking a levy of somewhere between ?135million and ?153million for 2008-09, compared with an estimated ?94m from the latest scheme, the BHA&#8217-s document calls for the government to settle the levy on the basis of 15% of gross win on British horseracing.

The BHA also calls for betting exchanges to contribute to the levy on a new and equitable basis, stating that the contribution made by betting exchanges to the Levy should increase from the ?6m paid in 2006-07 to ?20m.

This figure would be achieved, they argue, through the imposition of a 1.25% Levy on the net profits of punters on betting exchanges, raising the possibility that Betfair et al, may be forced to increase their commission charges.

An insight into the contentious issue of how betting exchanges should be taxed, may be found here:

http://www.bettingmarket.com/tax.htm

External Link: The Guardian

Sounds like Sean Park will strike it rich, once again.

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Sean Park (Founding Partner at Sixth Paradigm, and blogger at The Park Paradigm)

Sean Park is a leading independent thinker on the future of financial markets, the author of The Park Paradigm, and the founding partner of Sixth Paradigm LLP:

The technology of the digital age is driving an unprecedented explosion in the ability to create markets in anything. Trade anything. Not just physical goods. Not just financial instruments. But ideas. Events. Outcomes. The emergence of these kinds of markets will – over time – impact how we view and interact with the world in all aspects of our personal and professional lives. They will fundamentally alter the current world economic and social paradigm.

Sean is also a founding investor in innovative companies such as Betfair and WeatherBill (where he is also a non-executive Director) and has extensive experience investing in and advising start-up and high growth companies in addition to over 16 years of experience working at a senior level in capital markets and investment banking. Building businesses has been a key theme throughout his career.

I&#8217-m bullish on WeatherBill. They showed that an event derivative exchange can have a more user-friendly interface &#8212-stuff that BetFair-TradeFair and TradeSports-InTrade have not computed yet. I wonder whether the WeatherBill approach could work out with other risks &#8212-other than weather.

On Sean Park, as a blogger, one of my sources said to me that he sometimes elaborates on ideas invented by others years ago and makes it like they are his. I&#8217-m a brand-new feed subscriber to his little blog, so I&#8217-ll judge by myself.

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Previously: Thoughts on Weather Bill – by Eric Zitzewitz – 2007-01-04

What I think is most innovative is the idea of marketing a prediction market contract as “insurance.”