Are prediction markets useful?

No Gravatar

According to Alan Abramowitz, John Tierney has been &#8220-greatly exaggerating the accuracy of the betting markets.&#8221- &#8220-They follow the polls. That’s it.&#8221-

My comment to Alan Abramowitz and John Tierney:

&#8220-They follow the polls. That’s it.&#8221-

Yes, they follow the polls. No, that&#8217-s not it.

Traders also dig the news of the day and make anticipations about the outcome. For instance, towards the end of the 2008 Democratic primary, the polls and the mass media were still giving Hillary Clinton a very good standing, whereas the prediction markets (informed by a bunch of political experts who did the counting of the delegates and super-delegates) were telling us that she was as toasted as Lehman Brothers in the middle of the credit crunch crisis.

Are prediction markets useful? If John Tierney wants to answer this question, he should pick up a prediction market and put it in the social context of that day. Some prediction markets are more useful than others. In the case of the 2008 Democratic primary (a complicated matter), the prediction markets sided with the best informed political experts against the mass media and the polls. So to speak, they were an umpire. In that case, we see the emergence of a social utility. We now have the case for the media citing more the probabilities of the liquid (play-money and/or real-money) prediction markets.

Previously: #1 – #2 – #3 – #4 – #5

External Link: Club of Growth

Dont pump up the features of the prediction markets -instead, put the emphasis on their benefits.

No Gravatar

John Tierney and Jed Christiansen are making the same mistake: they think that people and experts should be impressed by the information aggregation functionality of the prediction markets. They are not &#8212-people still prefer reading Nate Silver and over InTrade, and the political experts have not added InTrade in their toolbox. (On this last point, do read the very last sentence of that interview.)

You won&#8217-t be impacting if you publish enthusiastically about the features of the prediction markets &#8212-yes, they do incorporate the latest news quickly, they quantify reasonable anticipations, they output probabilities, and they are relatively unbiased. You will be impacting the day you are able to demonstrate the benefits of the prediction markets &#8212-for people, on one hand, and for the experts, on the other hand.

This would require a new focus, and a much bigger effort.

The social utility of most prediction markets is minimal &#8212-busy people (who don&#8217-t have time to read extensively the news) get relatively objective probabilities, real quick. But very few companies are using enterprise prediction markets, as of today. If these new IAM tools were magical (as some sur-excited free-market proponents think they are), all the Fortune-500 companies without any exception of any kind would be using them today.

If you want to discover the true benefits of the prediction markets, you should first be able to rank them by degree of utility. Which ones are more useful than others? Why? To answer this last question, you have to lay out the panorama of all the information sources that people and expert have access to, these days. What were the specific instances where the prediction markets were a tie breaker between the experts and the mass media, or between the decision makers and the experts, or between 2 opposite groups of experts? You should build an airtight, documented case. I haven&#8217-t seen such a case, yet. If some of my readers are interested in such a project, let&#8217-s talk.