While TradeSports-InTrades growth seems slow, BetFair-TradeFair is poised to experience a formidable expansion in the coming years.

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The Independent of Ireland:

Betting exchange Betfair is to steal a march on its rivals with the introduction of a new service which will boost liquidity and offer punters the chance to make bets at starting prices. Up to now, betting exchanges, such as Betfair, operated by matching bets on either side. But it will now offer a guarantee that punters can get on as much as they need, as long as they are willing to plump for starting price (SP) odds. However, the SPs offered will not be those quoted in betting shops, but prices fixed by the exchange.

A spokesman said the new service was expected to give the business a big boost. &#8220-Currently, 40% of all bets are settled at SPs and this type of business tended to pass us by up to now,&#8221- he said. Betfair is already the largest exchange operation, ahead of the Dermot Desmond-owned Betdaq business. Estimates put the market share of exchanges at around 5% and this development could significantly boost that figure, the spokesman said.

Well, best wishes to BetFair-TradeFair.

Previously: The BetFair Starting Prices… explained

Previous blog posts by Chris F. Masse:

  • The marketing association between BetFair and TOTE Tasmania works better than expected.
  • The term “event markets” sucks —and the uncritical thinkers using this crappy term suck too.
  • CLIMBING HIS WAY TO THE TOP: Erik Snowberg is now Assistant Professor of Economics and Political Science at California Institute of Technology.
  • Unlike other countries, the United States of America defends the freedom to offend in speech.
  • The best research papers on prediction markets
  • 2008 Electoral Map
  • American Enterprise Institute’s Center For Regulatory And Market Studies (Policy Markets)

When your annual growth is +444%, youre not a Red Herring anymore.

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YOU&#8217-RE A BLUE WHALE, RATHER.

Blue Whale Comparison

Blue Whale (Balaenoptera musculus) with the vulcano Pico Island, Azores, in the background

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This is from Silicon Alley Insider.

Top 10 Blogs for October 2007 (U.S., Home and Work)

Please view in a fixed-width font such as Courier.+-------------------+----------+----------+-----------------+| Site              |   Oct-06 |   Oct-07 |  Percent Change ||                   | UA (000) | UA (000) |                 |+-------------------+----------+----------+-----------------+| Blogger           |   21,572 |   34,104 |             58% || WordPress.com     |    2,104 |   11,440 |            444% || Six Apart TypePad |    8,813 |   10,601 |             20% || tmz.com           |    7,107 |    7,805 |             10% || LiveJournal       |    3,366 |    4,260 |             27% || Xanga.com         |    4,760 |    2,741 |            -42% || Thatsfit          |     534* |    2,613 |            389% || Gizmodo           |     941* |    2,135 |            127% || Autoblog          |      920 |    1,949 |            112% || StyleDash         |    1,319 |    1,947 |             48% |+—-—-—-—-—-—--+—-—-—--+—-—-—--+—-—-—-—-—-–-+Source: Nielsen Online

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I made the right choice, last year. Midas Oracle is proudly powered by WordPress.org (which is the portable version of this open-source blogging software).

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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?

Justin Wolfers dreams of a prediction market land, where exchange odds are cited but not the polls.

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Knowledge @ Wharton (on polls):

The Power of Prediction Markets

The rapidly changing landscape of responders and related technology factors are two reasons why Justin Wolfers, Wharton professor of business and public policy, believes in the power of prediction, or betting, markets. Wolfers &#8212- who is associated with several prediction market sites such as InTrade.com or Tradesports.com [*], where participants buy and sell contracts on sports and potential political outcomes &#8212- argues that prediction markets are a more reliable outcome predictor than polls, for three reasons.

&#8220-First, by forcing you to &#8216-put your money where your mouth is,&#8217- they yield truthful revelation of beliefs,&#8221- Wolfers notes in a paper on pricing political risks with prediction markets. &#8220-Second, markets provide profit opportunities for those willing to gather new information that helps predict the future. And third, markets aggregate information dispersed across many traders.&#8221-

&#8220-You are not asking who they will vote for, but who they think will win,&#8221- says Wolfers. &#8220-The evidence is overwhelming that prediction markets provide a more accurate prediction than polls. On average, the final forecast from a Gallup poll is within about 2.25 percentage points, and the average for prediction markets is 1.5 percentage points.&#8221-

He points out that &#8220-the idea of betting on presidential elections is not new at all. Betting on elections has been going on for the last 100 years. If you read The New York Times from the turn of the century [**], they will report what is in the prediction markets &#8212- called &#8216-betting markets&#8217- back then &#8212- and not polls, which hadn&#8217-t yet been invented. But since 1940, the elections have been dominated by polls.&#8221-

Wolfers predicts that &#8220-within a few years and a couple of election cycles, we will be back to tracking political markets through the lens of prediction markets instead of polls. [***] In fact, in the last few election cycles, we have seen political commentators talking more and more about the race in light of prediction markets.&#8221-

[*] What kind of association is it? I take it that it is an informal association. I have never seen anything written on the InTrade-TradeSports sites.

[**] Thanks to Paul Rhode and Koleman Strumpf. PDF file

[***] I would be more prudent. I&#8217-d say that more and more commentators will follow the prediction markets, but the polls will remain the dominant barometer.

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UPDATE: Emile Servan-Schreiber (NewsFutures CEO) comments&#8230-

1) The traders themselves are the first to look at the polls to inform their trades. So the polls are here to stay.

2) Our recent experience in Western Europe seems to indicate that the superior accuracy of markets over polls when predicting elections may be a U.S. artifact that isn&#8217-t so easily reproducible elsewhere. I&#8217-ve discussed this with Forrest Nelson of IEM [Iowa Electronic Markets], and apparently, ever since the Truman-Dewey polling debacle of 1948, U.S. pollsters have adopted a policy of reporting mostly raw numbers rather than projections based on sophisticated secret formulas, so they can&#8217-t be accused of manipulating opinion. However, raw numbers are notoriously unreliable when based on small samples, and Western European pollsters never report them, preferring instead to publish projections based on historically-informed statistical formulas. What we&#8217-ve observed in France and Holland is that it it&#8217-s very hard to beat the accuracy of such projections.

Are serial entrepreneurs the best to start up brand-new prediction exchanges or prediction software companies?

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Don&#8217-t we put too much into the &#8220-serial entrepreneur&#8221- myth?

#1. The founder of RedFin believes that serial entrepreneurs are likely to do worse, not better, than start-up newbies. Guy Kawasaki agrees.

#2. Google&#8217-s Melissa Mayer was on CNBC to talk about the You&#8217-Re The VC website.

Prediction Markets = Clear Expiry + Disperse Information + Participation Incentives

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Jed Christiansen at Forbes (just after John Delaney&#8217-s ill-written and pointless comment):

A market effectively aggregates the information from everyone participating. So anything where:

  • there is a clear result
  • information is dispersed between people and/or locations
  • people have an incentive to participate in the market

will likely provide better results than any other forecasting method. Experts just aren&#8217-t as good as they (or anyone else) think they are. It&#8217-s simply better to ask the crowd in these cases.

Missing from Jed Christiansen&#8217-s comment is the emphasis on long series for comparison. Takes time and hundreds of prediction markets to prove the wisdom of crowds.

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UPDATE: Jed Christiansen comments&#8230-

Chris, I agree that for probability assessment, a number of measurements are required to assess success. However, for metrics (ie, sales of widget X, rating of product Y) it doesn&#8217-t require a long series at all. Depending on how poor the current forecasting model is performing, a prediction market could prove successful after just a few measurements.

ads, auctions and markets: a proposal

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Ads make the web go round. US internet advertisement expenditure is expected to surpass $21 billions in 2007, while the share of web ads in the UK is already bigger than ad spending in radio and newspapers. More specifically, adwords (+adsense) is maybe the single reason behind growth and sustainability of the biggest business fairytale in our times, returning for example $2.6 (+$1.0) billions in 2006Q3 alone.

Textual ads are auction powered. Speaking of Google, let me repeat the well-known process (which is valid with some variations also in Yahoo&#8217-s Search Engine Marketing and Microsoft&#8217-s ad center -forgive my partial knowledge). Each time you view or click on an ad link, the advertiser rewards the site owner for the use of her screen real estate and the redirection of your attention span. More accessible real estate costs a lot, as the more the advertisers pay the higher their ad is ranked and exposing their message to more visitors. Ad ranking occurs mainly from a dynamic Vickrey auction model, namely cost-per-click bids is the most influential factor defining your ads rank. But, to my eyes, the system&#8217-s current status seems sub-optimal. From the ad platform engine&#8217-s perspective, earnings aren&#8217-t maximized, as the advertiser pays only for actual clicks and not for impressions. From the advertiser&#8217-s view, the ad&#8217-s impact is also sub-optimal, as high rank doesn&#8217-t guarantee more visitors, in the case of low ad relevancy to the user&#8217-s query and actual interests. Finally, and most importantly, the auction-based fundamental model doesn&#8217-t accumulate the collective intelligence of the previous visitors&#8217- behavior and probably results in a poor user experience. (Well, in practice, clickthrough rates are also evaluated and the adrank algorithm is much more complicated, but this doesn&#8217-t reduce the validity of comments on the fundamental choice of an auction model).

While the auction-based approach apparently works, let me propose a more simple, direct and transparent market-based variation. In such a case, the ad-space of the universe of all potential keywords combination consists a gigantic marketplace, while each keywords&#8217- combination will form a market in this marketplace. In each market, an advertiser&#8217-s submission triggers the creation of a stock, which is initially traded at the defined cost-per-click price. But this price is nothing but constant- it goes up each time a user clicks on the ad, or down each time a user clicks on a different ad (this second action could even be omitted). As a result, stock prices, therefore ad ranking, evolves dynamically to enhance previous visitors&#8217- choices and leverage the wisdom of crowds in forming an elegant user experience. Moreover, it maximizes engine&#8217-s gainings and advertisers&#8217- impact, while enables a fully trackable procedure for advantage of both the platform and its users.

I would like to stress my lack of extended or insiders&#8217- knowledge on the topic, but I&#8217-m more than eager to discover relevant attempts, or -even better- participate in some attempt to put this idea into reality.

cross-posted from my blog

The BetFair Starting Prices… explained

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The Guardian (which has the best coverage on BetFair-TradeFair):

The Betfair betting exchange will launch its starting price betting service in the middle of next month, after it received the approval of a number of the exchange&#8217-s biggest-staking clients at a series of demonstrations over the last seven days.

Betfair has spent two years developing a robust system to allow bets to be placed at its own SP. As a result, three extra columns will soon be added to its display for every win market on its British and Irish racing service: one for bets on a horse at the Betfair SP, one for &#8220-lay&#8221- bets against it at SP, and a &#8220-guide&#8221- price in the middle showing what the SP is likely to be.

The SP market and the normal exchange market will be separate, in an attempt to ensure that it is extremely difficult to manipulate the SP. Betfair also hopes to offset any reduction in overall liquidity – which is vital to any exchange – by attracting new clients.

The great majority of off-course bets are still settled at the official SP, derived from on-course betting markets, while even on the internet, around 55% of racing bets are settled at SP. The Betfair SP, derived from a market with a negligible profit margin, will allow punters to make a direct comparison between the bookmakers&#8217- odds and those on offer on the exchange.

SP bets will have some differences from &#8220-normal&#8221- bets on Betfair. Whereas normal bets can be cancelled until the moment when a rival gambler accepts the other side of the bet, SP bets cannot be cancelled once placed. Punters can, however, specify a minimum price at which they are willing to back, and a maximum price for lay bets.

In time, SP betting is likely to extend to the exchange&#8217-s place-only markets, and to many other sports in which the SP concept has never been used before.

&#8220-This has the potential to be the most significant step forward for Betfair since the exchange was launched,&#8221- Stephen Burn, Betfair&#8217-s director of horse racing, said yesterday. &#8220-Racing is scratching the surface. In time, we hope that we will be able to add it across football, tennis and so on. We could even return an SP on the next general election.&#8221-

Niall O&#8217-Connor has more.

NEXT: More on BetFair&#8217-s Starting Prices.

Austan Goolsbee on Iraq and the Collective Wisdom of Bond Markets

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Austan Goolsbee, writing in the New York Times, discusses Michael Greenstone&#8217-s paper (discussed here at Midas Oracle in September) that examines the market for Iraq&#8217-s bonds for an assessment of the long-term future of the Iraq government. Goolsbee&#8217-s quick conclusion: &#8220-But global financial markets have been monitoring the war for months, and with remarkable consistency, they have concluded that the long-term prospects for a stable Iraq are very bleak.&#8221-

It wasn’t until Professor Greenstone began examining the financial markets’ pricing of Iraqi government debt that he had his eureka moment. It was immediately clear that the bond market — which, historically, has often been an early indicator of the demise of a political system — was pessimistic about the Iraqi government’s chances for survival.

First, some background &#8230- the Iraqi government issued about $3 billion of new bonds in January 2006. These dollar-denominated bonds pay 2.9 percent twice a year and mature in 2028, paying the face value of $100.

To say the least, the market for these bonds is not robust: as of last week, a bond with a face value of $100 was trading at around $60. Professor Greenstone calculated that, from the markets’ standpoint, the implied default risk over the life of the bond was about 80 percent.

The important point is that anyone who owns one of these Iraqi bonds has to decide each day whether the Iraqi government is likely to be functional enough to make its debt payments, or will default along the way. All else being equal, if the surge policy is effective, it ought to be raising the market price of these bonds.

Bondholders “aren’t politically motivated,” Professor Greenstone said. “They don’t have to rationalize their previous statements or justify their votes from years past. All they care about is whether there will be a functioning Iraq in the future such that they will receive their payments.” At a certain price, most securities will find a buyer, and there are still buyers for Iraqi bonds. But the price they are willing to pay is very low.

Goolsbee tosses in a few examples which show, in his words, &#8221- the collective wisdom of financial markets has proved remarkably adept at evaluating events and predicting the future, even the turning points of war&#8220-:

During the American Civil War, for example, when Confederate forces lost at Gettysburg, Confederate cotton bonds traded in England dropped by about 14 percent. During World War II, German government bonds fell 7 percent when the Russians started their counterattack at Stalingrad in 1942, and French government bonds rose 16 percent after the Allied invasion at Normandy in 1944. Many such examples of the prescience of financial markets have been documented by economic historians.

Of course a few cherry picked examples, while suggestive, should not be considered conclusive.

Chris Masse, in a post about negative comments on the war by a just-retired high ranking military officer, said:

We can’t rely on retirees to tell us the truth. We need an anonymous information aggregation mechanism that gives an incentive to people who come forward with advanced information: the prediction markets.

While bond markets might be useful as a stand in for prediction markets, presumably well-designed prediction markets could provide a somewhat more articulated position than can be extracted from a twenty-year bond market.

NOTE: Greenstone&#8217-s paper, &#8220-Is the &#8216-Surge Working? Some New Facts,&#8221- is available from the SSRN.

Robert Schillers MacroShares = Flawed Product??

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Greg Newton:

The MacroShares are irretrievably broken. They have never performed as advertised. They show no signs of ever working as advertised. They are a disgrace to the ETF market, and have been, pretty much since they were introduced.

External Link: MACROshares

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:

  • 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.
  • DELEGATES AND SUPERDELEGATES ACCOUNTANCY
  • O’Reilly – Money-Tech Conference