How Decision Markets Work (with emphasis on InTrade) – by Robin Hanson

No GravatarVIDEO – (it&#8217-s a Guatemala-based website) – 2007-10-24

I have clicked on the second blue link, on that webpage, and Window Media Player opened, and now I am watching The Master Of All Universes lecturing a group of politics students&#8230-

The main difficulty in developing efficient public policies is misinformation and false beliefs. The traditional information institutions are the media academics, and informal communications. These institutions have limitations in providing reliable, efficient, useful and enough information to make decisions. Speculative markets base their profits on the prediction of price patterns and are proving to be an efficient information institution. Betting markets have been better and faster predictions than experts because manipulators develop more accurate information. Therefore, speculative and betting markets have to become the central institution on political institutions in order to have effective public policies.

Click here to read the chapter &#8220-Decision Markets for Policy Advice&#8221-.

Great. But the second part of the video is more painful to follow. The students&#8217- questions are sometimes inaudible.

Previous blog posts by Chris F. Masse:

  • Mat Fogarty’s Xpree needs a mini Chris Hibbert.
  • Did you know that Real Clear Politics (a political news aggregator in bed with InTrade) is now owned by Forbes?
  • Easter Egg made in Mathematica
  • MIDAS ORACLE POWER: People googling about BetFair’s new bet-matching logic are automatically directed to our group blog. BetFair’s SEO can return to the locker room.
  • David Pennock, a respected expert in prediction markets and market design, discusses some aspects of BetFair’s new bet-matching logic.

Merger Markets on Microsoft-Yahoo

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HP began to explore prediction markets in 1996, but did not even consider applying them to the 2002 HP-Compaq merger. Similarly, Yahoo and Microsoft are two of the companies mentioned most often as being involved in prediction markets (along with their main competitor Google), but I&#8217-ll bet none are considering the by-far-most-valuable markets they could create, on their just-announced proposed merger.

Decision markets could say whether this merger is good for shareholders, by estimating the combined stock price given a merger, and given no merger. Similarly, decision markets could say whether this merger is good for these firms&#8217- customers, by estimating the price and/or quantity of web ads given a merger, and given no merger. This might help convince regulators to approve the merger.

My main doubt here is whether ad price and quantity are good enough measures of the merger&#8217-s social benefits – what other outcomes could such markets estimate, to speak more clearly? And this is a very clear demonstration that these companies are just not serious about finding the highest value applications of prediction markets.

Cross-posted from Overcoming Bias.

The Future of the Prediction Markets

No GravatarEven a prediction market fanboy feeds on the polls &#8212-first and foremost. Steve Dubner, the journalist and co-author of Freakonomics, is, along with his two blog colleagues (Steve Levitt and Justin Wolfers), a strong supporter of the prediction markets. They all have blogged enthusiastically on prediction markets, since the inception of their blog. Steve Levitt calls the InTrade-TradeSports people in Ireland his &#8220-friends&#8220-. Wow. The Freakonomics blog even has a &#8220-Prediction Markets&#8221- blogroll (i.e., a list of external weblinks to the best resources on prediction markets) &#8212-where, of course :-D , Midas Oracle is the cornerstone. :-D To sum it all up, Steve Dubner and his colleagues are true believers in the predictive power of the prediction markets. Good.

Until you analyze this Steve Dubner&#8217-s Freudian lapsus:

[&#8230-] (Fascinating aside: according to a recent Times poll cited in the article linked above, the Florida G.O.P. race is as of now a virtual deadlock between four candidates: Huckabee, Giuliani, McCain, and Romney. This will almost certainly shift as a result of interceding activity, but still, what a spectacle!)

Which forecasting tool does Steve Dubner use to get a sense of the political race du jour? Not the prediction markets&#8230- but the polls.

That speaks volume on the nature of the prediction markets, as forecasting tools.

  1. The polls and the surveys are the primary purveyors of crucial political information, which the political analysts (and&#8230- Steve Dubner :-D ) use to write their reports.
  2. The political prediction markets feed on polls, aggregate them (and other disparate pieces of information), and delivers &#8220-the consensus opinion in a much finer and dynamic way than all the amorphous media buzz&#8220-. They are secondary forecasting tools. They are taken seriously only by the free-market believers (like us) &#8230- but, as the Steve Dubner&#8217-s quote shows, even the prediction market true believers check the polls first.

I think that:

  1. Because of its nature, the prediction market prism, which quantifies the impact of the news, will never be the dominant forecasting tool.
  2. Prediction market journalism will remain on the fringe. It should be developed to serve a targeted audience &#8212-the free-market believers, the busy people, and the event derivative traders.
  3. Conditional prediction markets (a.k.a. decision-aid markets) will never be taken seriously by the decision makers and the public. Robin Hanson&#8217-s tool is very smart, though. Applications should be found within the community of free-market believers, rather.
  4. Enterprise prediction markets (a la Google, Inkling Markets, Consensus Point, etc.) are very interesting because they reflect inside information that can&#8217-t be conveyed by the corporations&#8217- internal media.
  5. The prediction market approach (embodied by InTrade) will always be weaker than the betting exchange approach (embodied by BetFair). I still believe, though, that each prediction exchange should employ both &#8212-which is not the case, right now.


ADDENDUM: In fairnesses to Steve Dubner, it should be noted that, in the same post, he put up a blunt challenge to polling methodology:

[&#8230-] As for the discrepancy between the two polling questions, take note: that’s the difference between a fill-in-the-blank polling question (i.e., “Which is the most important problem …”) versus a leading polling question (”Do you view crime as a ‘very serious problem’?”). The next time you read a poll and think it may be hinky, ask yourself what question the pollsters actually asked. [&#8230-]

Previous blog posts by Chris F. Masse:

  • Red Herring’s list of the top 100 North-American high-tech startups includes Inkling Markets —but not NewsFutures, Consensus Point, or Xpree.
  • Professor Koleman Strumpf explains the prediction markets to the countryland people.
  • Professor Koleman Strumpf tells CNN that a prediction market, by essence, can’t predict an upset.
  • Time magazine interview the 2 BetFair-Tradefair co-founders, and not a single time do they pronounce the magic words, “prediction markets”.
  • One Deep Throat told me that this VC firm might have been connected with the Irish prediction exchange, at inception.
  • BetFair Rapid = BetFair’s standalone, local, PC-based, order-entry software for prediction markets
  • Michael Moore tells the Democratic people to go Barack Obama in Pennsylvania (a two-tier state), but the polls and the prediction markets tell us that that won’t do the trick.