Combinatorial Prediction Markets – David Pennock Edition

ACM:

[…] Prediction markets are gaining interest because the Internet allows greater worldwide access to them, as well as to the ever-increasing amount of data stored on any topic imaginable (which theoretically allows participants to make more informed predictions, individually and in aggregate). These factors, plus the enormous amount of computing power that will make it possible to instantly calculate exponentially small odds, are stimulating new research on advanced computational models in prediction markets. These models could be capable of analyzing entire events such as the annual NCAA collegiate basketball tournament, which begins a 63-game schedule with 263 possible outcomes by the tournament&#8217-s end. […]

Growing opportunities in internal private-sector prediction markets are also revealing divergent philosophies among the markets&#8217- designers. Many of the public markets feature price-adjustment algorithms built around answering discrete multiple-choice outcomes, such as which candidate will win an election or if a product will launch in month x, y, or z. […]

IEM steering committee member Thomas Rietz, a professor of finance at the university, says the aggregate zero-risk design of the IEM allows the markets to perfectly reflect the aggregate forecast opinions of its participants. By aggregate zero-risk, Rietz explains that when a trader enters a particular bilateral (either/or) market, he or she must buy one share of each choice, called a bundle, for a total cost of \$1. If the trader holds the bundle until the market concludes, there is neither profit nor gain. If the trader guesses the outcome successfully, and sells the losing unit of the bundle to another trader while the market is running, he or she picks up the original \$1 bet plus whatever price was agreed upon for the losing share that was sold. If the trader chooses to hold onto the loser and sell the eventual winner, however, they will incur the \$1 loss at payout time. At any given time, the number of eventual winning shares and losing shares is equal and held by the traders. So, the university bears no counterparty risk and there is no need to provide hedging margins that irrationally affect outcomes. &#8220-The price you would be willing to buy or sell for today is your expectation of its value in the future—the prices can be directly interpreted as a forecast,&#8221- Rietz says. &#8220-In ordinary futures markets, there is a long-lasting debate, going back to John Maynard Keynes in the 1930s, over whether prices can legitimately be used as forecasts, and it all hinges on whether or not people demand a return or face a risk in aggregate when they&#8217-re investing in these contracts.&#8221- […]

One enduring research problem on combinatorial markets is mitigating the effects a virtually unlimited spectrum of outcomes will have on creating markets that are so thin in trades they do not serve their purpose of aggregating information. In such markets, which might bear a resemblance to an enterprise prediction market in that there are not enough participants to provide a statistically valid spread of opinion, Pennock says a market-maker algorithm might serve as a price setter within widely acceptable limits. &#8220-I believe that approximation algorithms will be fine for the market maker, because people don&#8217-t really care about making bets on things that are incredibly unlikely, like 10?6 chance,&#8221- Pennock says. &#8220-But as long as you&#8217-re betting on something with a 10% chance of happening, we&#8217-ll be able to approximate pretty quickly with a market-maker price.&#8221- […]

David Pennock&#8217-s website and blog

Are collective intelligence solutions being oversold?

Xpree CEO Mat Fogarty:

Chris,

Management struggles to understand and plan for the future. When forecasts are inaccurate, corporations incur huge costs due to inventory write-offs, stock-outs, misallocated resources or cost of capital. Collective intelligence delivers objective, accurate forecasts in real time, thus saving many millions of dollars for our corporate clients. The solution is not being oversold, to the contrary, the potential vastly exceeds current awareness and adoption.

&#8220-If foresight is not the whole part of management, at least it is an essential part of it&#8221- (Henri Fayol, 1916).

In my 10 years experience as a management accountant and corporate planner, I have witnessed multiple forecasts suffer from inaccuracy due to uncertainty and biases. Whether forecasting a launch date, sales volume or cost of development, it is the systematic biases due to incentive systems, politics and common cognitive errors that contribute more to inaccuracy than the uncertainty. The problem stems from the fact that the owner of a forecast is normally the owner of the business unit / sales team / project, and budgets and bonuses are based on forecasts. This necessitates game playing and politics and makes the development of an objective, accurate forecast near impossible.

Collective intelligence can overcome these problems by incentivising a diverse crowd of knowledgeable employees to share their insight, balancing the resulting estimates, and rewarding accuracy and timeliness.

However, we are at an early stage in the development of this opportunity. There is still work ahead of us to develop the ideal mechanism to combine simplicy of UI [user interface] with richness of information gathering. In addition, we need to further develop the way collective intelligence interfaces with traditional corporate structures, processes and systems. These are Xpree&#8217-s challenges&#8230- stay tuned.

Mat
CEO, Xpree

My open question to Xprees Mat Fogarty

Mat, congrats for your expansion.

Will Jim oversell the predictive power of the enterprise prediction markets?

All the other &#8220-business development&#8221- directors I see out there are overselling, in my view.

Xpree vs. Inkling Markets

I am usually very sympathetic to Inkling Markets and Adam Siegel. I think they are the most professional prediction market consultants. However, I am more impressed by the recent Xpree hiring than by the recent Inkling hiring. Leslie Fine is a market design specialist and a fine researcher, who will bring credibility and expertise to Xpree. Very good coup by mister Mat Fogarty. I am very impressed. Wow.

You know what I thought when I first saw that picture (little Fogarty planted next to Master Of Credit Alan Greenspan)?… I thought, well, its about time that the prediction market industry does the product endorsement by celebrity marketing thing. BetFair premiered that with John McCririck.

TV-famous horse racing pundit: John McCririck.

John McCririck endorsing BetFair

Google PageRank of the main Prediction Market Consultants

Inking Markets and NewsFutures are graded 6 / 10.

Consensus Point and Xpree are graded 5 / 10.

My great friend David Perry of Consensus Point is making a strategic mistake by insisting on discretion and secrecy.

I told him 10 times.

To no avail.

Pissing in a violin in order to create a symphony would have been more fruitful.

PageRank is important.

One day, we will learn in the Wall Street Journal that a Fortune-500 CEO is fired by the board for a low PageRank.

That will happen one day- you will see.

The Prediction Market Consultants