Hey, mister the pragmatist, how come you never informed the readers of your (otherwise, very smart) blog that CFTC-regulated HedgeStreet bellied after 3 years, burning in vain $24.9 million?

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Wouldn&#8217-t that hard fact (the $24.9 million that disappeared in flames) be worthy of being cited, for the sake of &#8220-pragmatism&#8221-, on a blog written up by a &#8220-pragmatist&#8221-?

So, my good doctor, when is it that you&#8217-re going to tell the truth to your readers?

UPDATE: See his comment, just below&#8230-

CFTC Oversight May Not be a Boon.

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I want to quibble with one of Dave Pennock&#8217-s comments on the CFTC request. Pennock wrote &#8220-It&#8217-s not often that an industry in its infancy cries out for more government oversight.&#8221-

It&#8217-s actually quite common. The term in the economics literature that includes this is regulatory capture. When there&#8217-s a regulatory body specific to a particular industry, it&#8217-s very common for industry to be the major source of expertise in the area, and so for the regulators to be reasonably friendly with the businesses. The businesses can work for regulation that limits entry, and cuts down on competition that reduces profits, and they can work together to ensure that public relations problems are addressed in a cohesive way. But cutting down on competition often means fewer choices for consumers by way of tighter controls on what products are offered.

In our case, the thing I worry about is a narrow ruling that only &#8220-socially valuable&#8221- questions can be asked, and an expensive process for deciding what innovative questions can be posed. It seems likely that some interests will work to ensure that sports and entertainment questions be declared off-limits. The companies that have the strongest interest in fighting that faction are mostly persona non grata in the CFTC&#8217-s eyes, since they currently operate outside the law (TradeSports) or outside the country (BetFair).

The narrower the set of approved questions, or the more expensive the process of getting approval, the less chance that markets will be commercially successful. I think the experiments within companies have indicated (though not proven) that a mix of valuable and popular claims is necessary in order to attract continuing participation.

My biggest worry about fighting for CFTC regulation at this point is that they&#8217-ll approve something narrow, and this won&#8217-t produce enough successes to demonstrate that loosening the restrictions over time would be beneficial. The alternative is to continue to find ways to introduce markets under the radar and demonstrate their value to the academic audience, which could lead to a friendlier hearing in a more distant future after prediction markets have demonstrated social value and little risk of harm.

Of course the other likely outcome is that the novel experiments don&#8217-t happen because of the threat of litigation or regulation. But that seems unlikely given the growth in internal markets within companies. I think there&#8217-s more likelihood of long-term success without regulation than with it, and we&#8217-re better off waiting until the chances that the regulations will provide a broad approval are significantly higher.

(Cross-posted from pancrit.org.)

How accurate are prediction markets in US elections?

No GravatarUnless you&#8217-re just just surfacing from an Afghan cave, you can easily guess who that &#8220-David&#8221- could be&#8230- :-D

Yahoo! Answers on prediction markets

Previous blog posts by Chris F. Masse:

  • The Most Surprising Piece Of News I’ve Heard Today
  • My first prediction market plugin for WordPress
  • Self-Serving Prediction Market Of The Day — Unlawful Internet Gambling Enforcement Act of 2006
  • Prediction markets tend to be so illiquid, though, that mere activity looks like volatility.
  • Decision Markets and Futarchy are solutions in desperate search for a problem to solve and for their early adopters… and that may stay that way well after Robin Hanson’s head gets cryogenized.

Meet Yahoo! research scientist David Pennock.

No GravatarDavid Pennock

David Pennock

Previous blog posts by Chris F. Masse:

  • Robin Hanson wants to rule the world —just as CEOs and heads of states do for a living.
  • Predictify got funded… Great for those who will be hired… But is it a good thing, overall?
  • Nassim Nicholas Taleb likens modern-day financial markets to medicine in the 1800s, when going to a hospital in London or Paris multiplied your risk of death by four times, he says. Similarly, quants increase risk by deploying flawed financial tools designed to reduce it, he argues.
  • TradeSports-InTrade — Check Deposits
  • BetFair Australia fought for free trade across Australian state boundaries… and won.

Linear Programming – Combined Value Trading – Parimutuel Call Market – Combinatorial Call Markets

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David Pennock:

[…] Each order is associated with a decision variable x that ranges between 0 and 1, encoding the fraction of the order that the auctioneer can accept. There is one constraint per outcome that ensures that the auctioneer never loses money across all outcomes. The choice of objective function depends on the auctioneer’s goals, but something like maximizing the fill fraction makes sense.

Once the program is set up, the auctioneer solves for the x variables to determine which orders to accept in full (x=1), which to accept partially (0&lt-x&lt-1), and which to reject (x=0). The program can be solved either in batch mode, after waiting to collect a number of orders, or in continuous mode immediately as new orders arrive. Batch mode corresponds to a call market. Continuous mode corresponds to a continuous auction, a generalization of the continuous double auction mechanism of the stock market.

Each order consists of a price, a quantity, and an outcome bundle. Traders can just as easily bet on single outcomes, negations of outcomes, or sets of outcomes (e.g., all Western Conference NBA teams). Every order goes into the same pool of liquidity no matter how it is phrased.

Price quotes are queries to the linear program of the form “at what price p will this order be accepted in full?” (I believe that bounds on the dual variables of the LP can be interpreted as bid and ask price quotes.) […]

Go reading all the post. There is a bunch of good comments&#8230- the best was submitted by Mike Giberson&#8230-

Work for free for InTrade -and become famous (a little bit).

InTrade embraces &#8216-crowd sourcing&#8217-:

Intrade is looking for New Market Ideas!

Friday, Jan 25, 2008

What uncertain event are you interested in trading? What uncertain event are you interested in getting predictive information on from the Intrade community? Please let us know by mailing [email protected]

By suggesting a new market* and agreeing to be cited you will be joining an impressive list of luminaries from Academia, Business, and Government.

Here is just a small sample of those who have previously suggested markets that Intrade has listed?

  • Robin Hanson (Prof.)
  • International Strategy &amp- Investment Group
  • Peter McCluskey
  • David Pennock (Dr.)
  • Mark Perry (Prof.)
  • Koleman Strumpf (Prof.)
  • Justin Wolfers (Prof.)
  • Eric Zitzewitz (Prof.)

Before we list any new market we [endeavor] to ensure the following:

  1. The market will be easily understood and capable of definitive settlement.
  2. Market is based on an event that is of significant economic, social, or public interest.
  3. Typically be defined as a yes or no (0-100) proposition.

Ensuring your suggestion complies with the above criteria [maximizes] the chance we will list your suggestion for free. In other circumstances we may still list your suggestion for a fee.

*A market that we list and had not previously listed or considered.

They should look in the direction of PopSci PPX for new ideas. [And they should look for a Merriam-Webster dictionary to write the North-American English correctly. I have corrected them two times.]

Yahoo! Research scientist David Pennock&#8217-s prediction market proposals for InTrade are great.

And what about a prediction market on whether North Korea will soon launch an intercontinental missile? :-D

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NEXT: I recommend that you read the comments on David Pennock&#8217-s post.

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

  • Why you should launch your brand-new prediction exchange at a conference
  • Why Indian Software Outsourcing Companies are Outsourcing to China
  • Midas Oracle is the only popular, independent, exhaustive, multi-author, multi-exchange, Web-based resource on prediction markets.
  • Here’s an example of the total crap that the BetFair blog is publishing.
  • P(election) = P(nomination) * P(election conditional on nomination)
  • Journalism Failures — Big Time
  • South Carolina showdown: Barack Obama vs. Hillary Clinton

WordPress is a bit like WikiMedia (the software powering Wikipedia), now.

Two weeks ago, I was seeking a WordPress way to have multiple authors for a post or a page. I found 2 interesting plugins.

  1. The CO-AUTHORS plugin, which does what it says. One specific post or page can be assigned two or more co-author(s) by the blog editor. Very interesting. (I don&#8217-t get why the plugin developer forbids the co-authors to &#8220-edit&#8221- the post/page, though. Mystery, which I will try to clear up with the software architect of this plugin.)
  2. The ROLE MANAGER plugin (not listed in the official WordPress plugin directory), which changes the standard WordPress matrix of roles and capabilities. It can redefine the capabilities of one category of users (i.e., one &#8220-role&#8221-), and can change the capabilities of one individual, but won&#8217-t assign common capabilities on a post/page-by-post/page basis (unlike the CO-AUTHORS plugin). To put it in another way, the ROLE MANAGER plugin can be used to extend (or restrict) the capabilities of the blog authors. Right now, they can only publish a post, not a page. In this instance, they would be allowed to write and edit pages &#8212-without the need for the blog administrator to promote these authors as full editors (which would be tricky since those multiple editors could then edit their peers&#8217- posts &#8211-not acceptable in a big group blog with 71 blog posters).

Very interesting.

On Midas Oracle, one could have:

  • Authors Mike Giberson and Adam Siegel writing together a post on &#8220-How Great An Exchange Inkling Markets Is&#8220-.
  • Authors Chris Masse, Mike Giberson, David Pennock and Jason Ruspini writing together a page on &#8220-The Ultimate Prediction Market Definition&#8220-.
  • Etc., etc., etc.
  • If plenty of co-authors collaborate on a post/page, then my hope is that Midas Oracle could become more than just a &#8220-blog&#8221-, and be also a vertical encyclopedia on prediction markets. (Of course, participation inequality remains an issue.)

[External Reading: For the life of you, don’t miss this blog post by Tim O’Reilly on Wikipedia.]

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UPDATE: The creator of the CO-AUTHORS plugin writes back to me:

Not allowing all of the co-authors the ability to edit a page is not by design- I just have to do more research on WordPress permissions to find out how to do so, if even it is possible.

I wonder whether using the two plugins together is the solution&#8230-

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UPDATE: My current thought is to give each Midas Oracle author the capability to create, write up and edit his/her own page(s). And then to assign co-authors to some post(s) and page(s), on a case-by-case basis.

Predictocracy: Market Mechanisms for Public and Private Decisionmaking – THE MARKET WEB

Predictocracy: Market Mechanisms for Public and Private Decisionmaking &#8211- by Michael Abramowicz &#8211- 2007-xx-xx &#8211- (fall)

Chapter: The Market Web &#8211- (towards the end of the book)

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Michael Abramowicz:

If prediction markets should become commonplace, decisionmakers might link to them in their own analyses.

Will trading play-money and/or real-money event derivative contracts become commonplace? It&#8217-s likely, at the contrary, that trading will remain an elite occupation and that prediction markets with appropriate liquidity will remain scarce. Unless Google, Yahoo! (with Yootopia) and/or MicroSoft has/have a secret plan to popularize betting exchanges &#8212-which could well be since Bo Cowgill, David Pennock and Todd Proebsting are ambitious guys.

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Michael Abramowicz:

For example, suppose that a corporation is deciding whether to build a new factory in a particular area. That decision might depend on variables like future interest rates and geographic patterns. And so, a decisionmaker might build a spreadsheet containing live links to prediction markets assessing these issues.

Interest rate prediction markets would help, for sure. As for geographic forecasting, maybe non-trading mechanisms could help &#8212-for real estate, I&#8217-m thinking of Zillow, or some improved mechanisms derived on Zillow.

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Michael Abramowicz:

The Market Web

If prediction markets should become commonplace, decisionmakers might link to them in their own analyses. For example, suppose that a corporation is deciding whether to build a new factory in a particular area. That decision might depend on variables like future interest rates and geographic patterns. And so, a decisionmaker might build a spreadsheet containing live links to prediction markets assessing these issues. That way, as the market predictions change, the spreadsheet&#8217-s bottom line would change as well. Predictions in many prediction markets may be interrelated, and so market participants in one prediction market will often have incentives to take into account developments in other prediction markets. Prediction markets thus can affect one another indirectly, as participants in one update their models based on developments in another.

Sometimes, however, it might be desirable to construct links among prediction markets so that changes in one automatically lead to changes in another. Consider, for example, the possibility of a market-based alternative to class action litigation. In Chapter 8, each adjudicated case represented a separate prediction market, but often there will be issues in common across cases. Many thousands of cases may depend in part on some common factual issues, as well as on some distinct issues. Legal issues also may be the same or different across cases. Someone who improves the analysis of any common factual or legal issue can thus profit on that only by changing predictions in a very large number of cases. A better system might allow someone to make a change across a single market and have that change propagate automatically to individual cases.

The critical step needed to facilitate creation of the market web is to allow a market participant to propose a mathematical formula to be used for some particular prediction market. Some of the variables in that formula could be references to other, sometimes new, prediction markets. For example, a market participant might propose in a market determining how much amages the plaintiff should receive a formula dependent on variables such as the probability that the plaintiff states a cause of action, the probability that the plaintiff was in fact injured, the probability given injury that the defendant caused the injury, the probability given a cause of action that the defendant is subject to strict liability, the probability given no strict liability that the defendant was negligent, and the damages that the plaintiff should be awarded if liability is proved. This formula, for example, presumably would allow for no damages where the plaintiff probably does not state a cause of action. Each of the components of this formula might be assessed with a separate prediction market. We can easily build the market web by combining three existing tools. The first tool is a text-authoring market. The relevant text would be the formula itself, including specifications of other prediction markets that would be used to calculate specific variables. As with any text-authoring market, a timing market would determine when a proposal to change the text should be resolved. Other markets might become live only once proposals to take them into account were approved. Ex post decisionmakers would assess the wisdom of these markets&#8217- recommendations in some fraction of cases to discipline the market&#8217-s functioning.

The second tool would be a simple normative prediction market corresponding to the text-authoring market. It might also be possible to have computer software that automatically parses the formula and consults various sources, but the market sponsor need not build this tool. Rather, ex post decisionmakers will assess the appropriate value for the normative prediction market based on the formula. An advantage of this approach is that it would make it easy to use complicated formulas, as well as formulas that depend in part on numbers from sources other than prediction markets, or from prediction markets of other types. In addition, this approach makes it easy to collapse a formula into a single prediction market, if that should prove desirable. The formula text simply would be changed to a description of the market to be created, such as &#8220-adjudication of plaintiff&#8217-s liability in a particular case.&#8221-

Finally, the third tool necessary is a mechanism for determining the market subsidy. A separate subsidy would be needed for the text-authoring market and the normative prediction market. Each of these subsidies could be determined by additional normative prediction markets, perhaps with fixed subsidies. The subsidy for the text-authoring market in turn would be distributed by the text-authoring market to individuals who have proposed particular amendments, and individuals who have participated in the assessment of particular amendments. The text-authoring market also could allocate a subsidy to the first individual who creates the market and proposes some text for it. When the text-authoring market produces a new formula reflecting additional prediction markets, the subsidy for the main prediction market would fall (since calculating a formula based on other prediction markets will often be relatively easy).

A single node in the market web would thus consist of a text-authoring market describing the node and providing a formula for calculating it, a normative prediction market, and a set of additional prediction markets for determining how to distribute a subsidy to the different components of the node. The nodes collectively create a web because the formulas link to other nodes- software, of course, could easily make these links clickable. At the same time, a mechanism is needed to determine what portion of the market subsidy each node should receive. A simple approach would be for a prediction market to be used for every link, to determine the portion of the subsidy for each node that should be allocated to each node linked to it. The total should add up to less than 1, leaving some portion of the subsidy for the node itself.

With these markets established, software could easily distribute a single subsidy for the market as a whole to market participants who have traded on individual nodes when the market closes. Market participants working on one portion of the web, meanwhile, would not have to assess the relative importance of one node to nodes that are only distantly related. It would also be straightforward to have a continuously open market, periodically collecting and distributing money in accordance with individual participants&#8217- success on the market.

This assumes that the market web would be arranged on a single server. It is possible, though, that a node on one market web might link to a node on another market web. If market sponsors allowed such links, it could promote competition among prediction market providers. It also partially answers one potential criticism of using prediction markets for decisionmaking, that a software engineer might hijack the government by faking some prediction market results. Market participants at least will have incentives to identify fake prediction markets and not link to them. In principle, it is possible to have government decisions based entirely on decentralized prediction markets. A caveat is that the government might want to subsidized individual market web providers, and it might use centralized prediction markets to accomplish that.

Whether or not the markets themselves are decentralized, they would allow market participants to make it easier to assess the basis for market predictions. Indeed, the market web is in some ways a substitute for deliberative prediction markets, because both provide means of helping observers understand the basis for the market&#8217-s predictions. An observer could look at any individual node of the market web and understand how it has been calculated, though inevitably there must be some &#8220-leaf&#8221- nodes that themselves do not contain any formulas. At the same time, software might allow an observer to find all of the nodes that link to a particular node. So a market participant addressing a factual issue relevant to many cases could link to all of the cases represented by that factual issue. As a particular issue becomes increasingly important, the subsidy for that node should rise, and market participants can profit on their analysis of the issues relevant to that node without worrying about details of individual cases.

[…]

Brainy stuff. I&#8217-ll mind this for a while. I&#8217-m sure that the Midas Oracle readers will find this idea original &#8212-and maybe, interesting.

PEAR lab (Princeton Engineering Anomalies Research) – REDUX – Retrocausality in physics

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In my previous blog post, I said that Princeton professor Robert Jahn has been unable of finding the right hypothesis about the so-called &#8220-psychic phenomena&#8221- (if any). I mentioned the work of a theoretical physicist, Olivier Costa de Beauregard, who interprets the E.P.R. paradox using the concept of &#8220-retrocausality&#8221- (the reversal of the arrow of time). I said that, speaking of the so-called &#8220-psychic ability&#8221- (if any), one could interpret the so-called &#8220-precognition&#8221- (if any) as a reversal of the psychological arrow of time, where the mind could receive information coming from its own future.

Well, today, via Jason Kottke, we have some news from the scientific world that scratches this concept of &#8220-retrocausality&#8221- (which we should not confuse with &#8220-finality&#8221-, I was told), and which seems to comfort the Costa de Beauregard&#8217-s interpretation:

Quantum theory describes the behavior of matter and energy at the atomic and subatomic levels, a level of reality where most of the more familiar Newtonian laws of physics (why planets spin, airplanes fly and baseballs curve) no longer apply. The problem with quantum theory, put simply, is that it&#8217-s really weird. Findings at the quantum level don&#8217-t fit well with either Newton&#8217-s or Einstein&#8217-s view of reality at the macro level, and attempts to explain quantum behavior often appear inherently contradictory. &#8220-There&#8217-s a whole zoo of quantum paradoxes out there,&#8221- Cramer said. &#8220-That&#8217-s part of the reason Einstein hated quantum mechanics.&#8221- One of the paradoxes of interest to Cramer is known as &#8220-entanglement.&#8221- It&#8217-s also known as the Einstein-Podolsky-Rosen paradox, named for the three scientists who described its apparent absurdity as an argument against quantum theory. Basically, the idea is that interacting, or entangled, subatomic particles such as two photons &#8212- the fundamental units of light &#8212- can affect each other no matter how far apart in time or space. &#8220-If you do a measurement on one, it has an immediate effect on the other even if they are separated by light years across the universe,&#8221- Cramer said. If one of the entangled photon&#8217-s trajectory tilts up, the other one, no matter how distant, will tilt down to compensate. Einstein ridiculed the idea as &#8220-spooky action at a distance.&#8221- Quantum mechanics must be wrong, the father of relativity contended, because that behavior requires some kind of &#8220-signal&#8221- passing between the two particles at a speed faster than light.

This is where going backward in time comes in. If the entanglement happens (and the experimental evidence, at this point, says it does), Cramer contends it implies retrocausality. Instead of cause and effect, the effect comes before the cause. The simplest, least paradoxical explanation for that, he says, is that some kind of signal or communication occurs between the two photons in reverse time. It&#8217-s all incredibly counterintuitive, Cramer acknowledged. But standard theoretical attempts to deal with entanglement have become a bit tortured, he said. As evidence supporting quantum theory has grown, theorists have tried to reconcile the paradox of entanglement by basically explaining away the possibility of the two particles somehow communicating. &#8220-The general conclusion has been that there isn&#8217-t really any signaling between the two locations,&#8221- he said. But Cramer said there is reason to question the common wisdom. Cramer&#8217-s approach to explaining entanglement is based on the proposition that particles at the quantum level can interact using signals that go both forward and backward in time. It has not been the most widely accepted idea. But new findings, especially a recent &#8220-entangled photon&#8221- experiment at the University of Innsbruck, Austria, testing conservation of momentum in photons, has provided Cramer with what he believes is reason for challenging what had been an untestable, standard assumption of quantum mechanics.

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Parting Shot: If &#8220-psychological retrocausality&#8221- (&#8220-precognition&#8221-, actually) could be engineered one day, then we could make a killing on prediction markets. I could have sold short the SENATE.GOP.2006 contract at TradeSports, and made as much money as scientist David Pennock did (or so he claims &#8212-and I saw that some vendor also made this self-interested and undocumented claim).

Ouch! – Finding from a Web usability expert (Jakob Nielsen): 50% of Web readers dont scroll down the webpage.

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From today&#8217-s New York Times:

Studies by Mr. Nielsen’s company, the Nielsen Norman Group, an Internet design firm in Fremont, Calif., show that only 50 percent of Web visitors scroll down the screen to see what lies below the visible part on their PC monitor. “Users spend 30 seconds reviewing a home page,” Mr. Nielsen said. “A business must encapsulate what they do in very few words.”

Web Usability Links:

– Jakob Nielsen: UseIt.com – AlertBox –

– David Pennock and Robin Hanson, the wannabe bloggers, would probably pass the following Jakob Nielsen test: Weblog Usability: The Top Ten Design Mistakes – by Jakob Nielsen – 2005-10-17

– Alex Kirtland – Blog: Usable Markets – E-mail interview with Alex Kirtland.