Predicting the shift in odds caused by knockout competitions can be extremely profitable and lends itself excellently to tennis.

The odds on at least one competitor winning a tournament will always be 100%. However, as the tournament progresses and the number of competitors lesson then so do the odds of the remaining competitors and the 100% gets redistributed as each round is completed. For example should someone trading at 4.00 be knocked out of a competition then there is suddenly 25% of probability that needs to be redistributed.

This strategy lends itself very well to tennis as competitors are always being knocked out at differing timescales and also you are looking for one of the favorites to progress to the next round early whilst his close rivals are still to play (it also helps if the player concerned has a relatively easy next round). You then back this player. If any of his rivals should be knocked out of the competition then the price on the player you have backed will come in significantly. And even if all of his close rivals do progress the price will only drift ever so slightly. This is an excellent low risk strategy as the following example shows.

Nikolay Davydenko was priced at 10.5 (9.52% chance of winning) 3^rd favourite for a very open tournament in
Paris. He had already qualified for the third round and all his close rivals were still to play so I backed him for ?25. Inevitably a couple of his rivals lost and his price went down to 8.00 (12.5% chance of winning). He was due to play the next round first and was a hot favourite priced around 1.2 I figured he would still progress further and his odds would shorten dramatically so to protect my poison I layed him for ?25 at 1.2 during this match. Which then meant if he went out I would lose nothing. He duly won and I lost ?5 however his price to win the tournament had now gone down to 5 (20% chance of winning tournament). Obviously I let this bet stand as once again all his rivals were yet to play and Yet again a close rival lost and his price again went down to 3.25 (30% chance of winning) It was then I greened up and made myself to ensure a ?55 profit whoever won. This ended up being a ?50 profit as I had lost ?5 during the earlier Lay.

As you can see providing you do your homework and keep an eye on the times the matches take place. (All this information is available on the atptennis.com ot the tournament website) this strategy can prove to be extremely profitable for very low risk. Obviously this strategy can work for any tournament in any sport for example should a team like Manchester United get through to the next round of the FA cup in a lunchtime kick off before everybody else is set to play it might be worth backing them in the hope that one or more of their rivals e.g. Chelsea, Liverpool and Arsenal lose that afternoon.

I will be using this principle and backing Maria Sharapova currently available at 5.9 on Betfair to win the womens US Open tennis which begins this week.

Should you require any further information go to

www.tradeonsports.co.uk

www.tradeonsports.blogspot.com

or e-mail [email protected]

Robin Hanson, in the eyeforpharma podcast linked here earlier, mentions three benefits of prediction markets: they can provide accurate estimates of event probabilities, they provide numerically precise estimates, and they provide continuously updated estimates. While some caveats would emerge in a longer discussion, a well-designed prediction market can provide an accurate, numerically precise, characterization of the current expectation about the underlying event.

Question: If you run a prediction market, who owns the right to use your market output?

Prediction markets in the United States may want to consider a recent court decision in a copyright case, that, depending upon the prediction market’s business model, may impinge on its exclusive use of public prices or other market data produced by its systems. Be warned that I am not a lawyer – I don’t even play one on TV. I’ve just read the court decision, and now I’m sort of ‘thinking out loud’ about what it might mean.

In New York Mercantile Exchange v. IntercontinentalExchange, the New York Mercantile Exchange (NYMEX) sought to enforce a copyright in NYMEX oil and gas settlement prices against the IntercontinentalExchange (ICE). ICE uses NYMEX’s daily settlement prices to clear ICE’s customers’ trades. NYMEX alleged that ICE’s use of NYMEX prices infringes upon NYMEX’s copyright. So far, courts have sided with ICE.

I discuss the reasoning a bit in a long post available at Knowledge Problem: “What is a Price?” The decision itself is available online from the Second District of the U.S. Court of Appeals. I won’t repeat all of my KP discussion here, but rather get right to what I think might be of interest to the prediction market community.

The court ruled against NYMEX’s copyright claim, arguing that NYMEX’s settlement prices could not be disentangled from the idea of the prices.

The court explained that NYMEX’s prices couldn’t be disentangled from the idea of the prices, because (1) prices will be expressed as a number, (2) only a small range of numbers would adequately reflect the underlying market conditions. “Because any settlement price for a particular futures contract would be determined based on the same underlying market facts, any dissension would be exceptionally narrow,” said the court. In such a case, the court concluded, granting a copyright would frustrate access to anyone else who sought to express the same idea.

Because ideas cannot be copyrighted, the court said NYMEX cannot be granted a copyright in its prices.

I don’t think this has any implications for internal company prediction markets, the results of which are probably protected as trade secrets rather than by copyright. But if a prediction market’s business model relies upon a copyright claim in the market’s prices or other market data, such business model may be threatened by the court’s decision in NYMEX v. ICE.

Despite what you may have read elsewhere, the probability of a fed funds rate cut has increased significantly over the last few weeks.

Felix Salmon and Barry Ritholtz seemed to find more merit in this analysis from WSJ Real Time Economics than I did.

Since the stock market began to sink a week ago, the federal funds rate for next January, as implied by futures markets, has plummeted to 5% from 5.2%. As a result, the implied odds of a quarter-point rate cut from the current 5.25% are said to have risen from 20% to 100%.

Well, nobody in their right mind would ever describe the odds as 100%, but let us not get diverted.

Lou Crandall, chief economist at Wrightson Associates, says while such action is commonly attributed to increased expectations of a Federal Reserve rate cut, that would be a mistake. The real reason, he said, is that investors are fleeing risk and seeking safety in Treasury bonds and bills and other high-quality paper, sending their prices up and yields down. As a result, the entire yield curve has shifted down. To maintain parity with that lower yield curve, the implied federal funds rate also has to drop, he says.

Mr. Crandall says, &#8220-99% of the universe, including a lot of people in those trades, don&#8217-t do it because they think the Fed will ease but because that&#8217-s the way the yield curve is shaped.&#8221-

But wait a minute: isn&#8217-t that a violation of efficient markets? If fed funds futures were out of line with a realistic expectation of Fed action, couldn&#8217-t smart people take positions in the mispriced futures and make a bundle six months later when it turns out the Fed didn&#8217-t cut rates? And shouldn&#8217-t such arbitrage push expectations of the Fed and pricing of futures back into line?

No, says Mr. Crandall, for two reasons. First, the Fed has gotten more predictable but gives no guarantees on where rates will go, so there is no assured profit on such a trade (so it wouldn&#8217-t really be arbitrage). Second, &#8220-The amount of money backing people who have opinions about where the Fed will be in six or nine months is dwarfed by the amount of real money being invested in short-term credit markets.&#8221- Nervous investors are willing to accept a lower yield than what might ordinarily be justified based on the economics in exchange &#8220-for safety. Market participants know that perfectly well. That&#8217-s why it&#8217-s called a flight to quality.&#8221-

The first odd thing about this statement is that it seems to suggest that there are two competing theories of how fed funds contracts get priced. The first theory evidently claims that the contracts reflect investors&#8217- expectations of Fed actions, and a second, supposedly contradictory theory claims that the contracts just follow the Treasury yield curve, as if we have to choose whether the fed funds futures contracts are priced in a way that is consistent with expectations of what the Fed is going to do or if instead they are priced in a way that is consistent with the yield curve.

But of course the answer is that they are priced in a way that is consistent with both. These and every other financial market are responding to exactly the same news that we&#8217-ve been discussing here, and drawing the same conclusions as we have. The latest economic news points to a considerably higher likelihood of economic softness, a situation in which the Fed will want to lower the funds rate and short-term interest rates will come down. That scenario is priced in the fed funds futures, in the term structure of Treasuries, in the stock market, in foreign exchange, and what not. Here&#8217-s what&#8217-s been happening over the last few weeks to the price of the November fed funds futures contract, the simple-minded interpretation of which (and the one that I favor) is that the expected fed funds rate for November has now fallen to 5%.

A second idea in the statement quoted above is the suggestion that one needs to add a significant risk premium to that fed funds futures calculation in order to arrive at the objective expectation of what the fed funds rate will be. It is true that risk premia play a role in the Treasury term structure, and fed funds futures should incorporate that same risk premia. A recent paper by Monika Piazzesi and Eric Swanson finds some indication that risk premia may play a role in longer-horizon fed funds contracts. But evidence for significant risk premia operating in very short-horizon fed funds contracts is much harder to find, as indeed theory predicts it would be. In recent years the Fed&#8217-s actions have become much easier to predict. As the accuracy of your forecast improves and the time horizon for your forecast gets smaller, the risk premium necessarily shrinks, and the risk premium on something you know with certainty has to be exactly zero. Perhaps Crandall is right that risk premia could be playing some role in the January fed funds futures contracts. But I find this story much less plausible for October or November contracts, and, as the figure demonstrates, movement in these was quite dramatic this week.

My guess is that we will indeed see a cut in the fed funds rate by the October 30/31 meeting, if not sooner.

The above article is cross-posted from Econbrowser.

Call it Occam&#8217-s razor, minimization of information entropy, or just KISS principle. Call it &#8216-less is more&#8216-, usability or just common sense.

The question is, are the currently available prediction markets web services compliant with the era of attention economics? Are we able to attract a critical mass of users, thereby surpassing the tipping point needed to turn the mechanism of markets to a typical decision support and forecasting tool?

If a picture is worth a thousand words and assuming that a website&#8217-s source code is an unbiased descriptor of its complexity, I attempted to take a look at the homepages of some popular prediction markets web services, using this &#8216-websites as graphs&#8216- tool. In the results that follow, each cycle represents an html tag.

• intrade

• hsx

• newsfutures

• thewsx.com (by consensus point)

• buzz game of yahoo, a source of inspiration to me

• my beloved inkling markets

• our approach at askmarkets.com (yet in alpha version)

P.S.: I didn&#8217-t include betfair because the graph occurred wasn&#8217-t descriptive of the true complexity of their homepage.

Cross-posted by gtziralis.com.

Since the launch of the simExchange, stocks and futures contracts have debuted at a price suggested by the submitter of the game with some adjustment by the admins of the simExchange. This price was generally too high or too low, resulting in sharp price moves following the IPO and windfall profits. This is expected as the forecast of an individual inefficiently aggregates information compared against a market. Although many traders have come to expect windfall profits from an IPO (possibly from the irrational exuberance of the 90s tech bubble), this is not how an IPO is supposed to work.

To remedy this problem, the simExchange began the use of an experimental new IPO process to determine the IPO price. We evaluated many IPO processes such as Dutch auctions and Parimutuel Auctions but decided on a Double Call Auction to keep the process simple. A double call auction is how trading on the simExchange has always functioned. The only difference from standard trading is that the automated market maker is turned off.

Price discovery works through traders submitting buy orders at the maximum price they are willing to buy at and submitting sell orders at the minimum price they are willing to sell at. Essentially, traders are posting a range of how well they think the game will sell—a maximum and a minimum.

For a single trader, this range may be very large. They may think a game will sell a minimum of 400,000 copies (40 DKP) and a maximum of 600,000 copies (60 DKP). This would equate to a buy order at 40 DKP and a sell order at 60 DKP. With this player’s orders alone, the bid-ask spread is a very large 20 DKP.

However, a second trader may believe the game will sell at least 500,000 copies (50 DKP) and at most 650,000 copies (65 DKP). The trader’s orders represents a 15 DKP bid-ask spread, but together with the other trader, the best bid is now 50 DKP and the best ask is now 60 DKP. The bid-ask spread is now 10 DKP.

A third trader believes the game may only sell 300,000 copies (30 DKP) with a max of 550,000 copies (55 DKP). The bid-ask spread is now 5 DKP. The order book would look like this:

As more traders submit orders, the bid-ask spread will tighten and converge on a market price. Individually, no one knows what the IPO price should be, but together, traders can narrow the range down substantially. This price range should be the best guess of a fair IPO price as this is where the buyers and sellers meet (the optimists and pessimists for the game’s potential sales). In this IPO process, trades only occur when traders are willing to buy and sell at the same price. Once again, this is no different from normal trading except there is no automated market maker submitting orders.

However, this process has proven to be difficult to understand for many members of the simExchange, especially those who use the Basic Trading mode, which is limited to placing market orders (orders that immediately take the best available price). If a trader is not used to looking at what is the current selling price, he may be in for a surprise when his buy order fills.

Originally we had considered reserving the IPO process only to those using the Advanced Trading interface so that traders are forced to identify the matching price they would accept. However, we thought traders using the Basic Mode should still be allowed to participate if they see a price they think is good for buying or selling. Of course, this assumes the trader using the Basic Trading mode is paying attention to the current bid and ask prices. However, many traders using the Basic Trading mode ended up with prices they were not happy with.

Last night, we have heard a deep debate regarding the IPO process. Our goal is to make accurate forecasts in an entertaining and easy to play process. It appears the experimental IPO process has failed to accomplish those goals for many traders.

Based on user suggestions, we will combine the experimental process with elements of the original IPO process into a 2-step IPO process. Once a stock or future is listed on the simExchange, there will be a stage to determine the IPO price. This will be a three-day period in which players place orders in a double call auction. To participate in the double call auction, the player must specify the maximum price he will buy at or the minimum price he will sell at. After the three-day period, an IPO price will be calculated. At this point, the second stage will occur with the stock or future available for purchase or shorting at the IPO price all day by all traders. Following this day, regular trading with automated market maker will commence.

This article was cross-posted from Discovering an IPO price dated July 26 on The simExchange Official Blog.

#1. David Porter is leaving as of this fall, Stephen Rassenti and Bart Wilson leaving in a year. Kevin McCabe, Daniel Houser and Mark Olson are staying at GMU.

#2. GMU still wants to be able to claim Vernon Smith&#8217-s name, and it could well be that he will remain with some affiliation at George Mason University.

#3. The ICES folks have had a tenuous relationship at best with many members of the economics faculty (Robin Hanson being the most prominent exception) and similarly shaky relations with other folks elsewhere in the university. [Note: About half the ICES crew strongly preferred to work at the Arlington campus, several miles from the main (more distant in the suburbs) Fairfax campus, where most of the department is housed.]

#4. Daniele Struppa [a male professor] was Dean of the College of Arts and Sciences at GMU when ICES arrived. Daniele Struppa, it seems, always did his best to make good on the university&#8217-s side of the deal that brought ICES to GMU. Daniele Struppa being at Chapman University, and now Chancellor, no wonder these ICES guys are so comfortable heading off to suburban L.A.

#5. In any case, within 24 hours or so of Wagner&#8217-s email to students, the ICES folks had heard from people at companies, federal agencies, etc., whom they were working, all calling to say &#8220-so, I hear you are leaving&#8221-. The ICES folks had heard from friends/associates in Europe within a day or so asking for news about what is up. In effect, Wagner&#8217-s (premature) email to students became the press release announcing the moves (even if all the details were not yet arranged).

&#8212-

NOTE: &#8220-ICES&#8221- as an entity was first established at GMU, but the six core faculty (Smith, Rassenti, Porter, McCabe, Houser, and Wilson) all arrived as a group from the University of Arizona, where they had all worked at the Economic Science Lab (which Smith led).

&#8212-

UPDATE: Tom W. Bell&#8230-

Chapman is in Orange County–not “suburban L.A.”

&#8212-

Previous: All GMU’s ICES faculty except Houser and McCabe are leaving to join Chapman University. + NOBEL LAUREATE VERNON SMITH LEAVES ROBIN HANSON’S GEORGE MASON UNIVERSITY TO GO WORKING FOR TOM W. BELL’S CHAPMAN UNIVERSITY.

NEXT: OFFICIAL: NOBEL LAUREATE VERNON SMITH DECAMPS FOR WEST COAST&#8217-S CHAPMAN UNIVERSITY.

NEXT: The latest about the departing of Nobel Laureate Vernon Smith from George Mason University to Chapman University

From: ECON-GRAD-L [mailto:XXXXXXXXX] On Behalf Of Ashley Boggs
Sent: Wednesday, 18 July 2007 2:05 a.m.
To: [email protected]
Subject: A New Regime for ICES Students
Importance: High

Dear ICES Students:

While this letter is for those economics PH. D. students who consider themselves part of the ICES program, it is being sent to all students on this list server because I have no way to identify those students until they advance to candidacy. All ICES faculty except Professors Houser and McCabe will be leaving GMU for Chapman University in Orange, California. The only unsettled question at this writing is whether they will leave next month or next year. Which departure date they choose, however, has no substantive impact on the contents of this letter.

So if you are an ICES student who has not yet advanced to candidacy, you need to read this letter. And even if you have advanced to candidacy, you should also read on because you can be affected by these changes as well. Indeed, I will divide the remainder of this letter into two categories that relate to those two sets of students.

NOT YET ADVANCED TO CANDIDACY

Ph. D. students are required to pass two field exams in addition to micro and macro exams before advancing to candidacy (and also to accumulate 48 hours of course work and have your dissertation proposal accepted by your dissertation committee). For students who have chosen to work within the ICES program, the requirement of field exams as been abolished because participation in the ICES program involves an extensive and intensive set of activities beyond the 48 hours of course work that serves in lieu of field exams.

Starting now, this abolition is abolished. From this point on, all Ph.D. students will have to pass the requirement of two field exams before advancing to candidacy. Starting January 2008, we will add experimental to our list of field exams, with Professors Houser and McCabe serving on the committee (and with a third faculty member to be named later).

Those ICES students who entered GMU in August 2006 are clearly subject to this new rule, as you are now only at the stage where you are now about to take the micro and macro exams.

ICES students who entered prior to August 2006 but who have not yet advanced to candidacy are in a different, more compromised position, and it is you who are the prime intended recipients of this letter. Only I don&#8217-t know who you are, so you must identify yourselves to me if you want to file for an exception to this change in rules.

Here is the deal: if you want to be exempt from the new requirement of two field exams (one of which would, presumably, be experimental), you must write me to this effect by 1300 on Friday 24 August 2007. If I do not have your request for exemption in hand by that time, you automatically will be subject to the requirement of two field exams.

If you do request an exemption, I will adjudicate your request. Let me note briefly the principles I will follow in that adjudication. The prime issue I will look at is whether you are almost ready to advance to candidacy. You must present me with evidence and testimony to this effect- in some fashion you must show me that you are well along in the process of forming a committee, and are not just thinking about doing so.

Another issue arises at this point, but it pertains as well to those ICES students who have already advanced to candidacy, so I will cover that issue in the next section of this letter. So please read on.

ALREADY ADVANCED TO CANDIDACY

GMU policy states clearly that all three members of dissertation committees must be full-time GMU faculty members at the time the dissertation is defended. For some of you, the precise character of your futures depend on just when the ICES faculty leave GMU. The principles in play, however, are invariant to that departure date.

If you can defend your dissertation before those faculty leave, you are done regardless of when they leave. But if they leave before you are able to finish, you will have to reconstitute your committees. At this point, expectation and anticipation enters the picture. If you truly expect to finish before they leave, it&#8217-s smart to stay on your current heading. If not, you will have to change your heading through re-constituting your committee, and doing that sooner rather than later will surely contribute to your timely completion.

As for those students who have not yet advanced to candidacy, some of you might be in the position of being almost ready to do so, and to do so with those faculty who will be departing. If they don&#8217-t depart until 2008 and if you and they conclude that you can finish before their departure, you should continue with your current plans and I will grant your request for exemption from the field exam requirements.

SUMMARIZING AND MOVING ON

I realize this is a terribly long letter, and is irrelevant to nearly all of you as well. For this imposition I apologize, but I know of no other way to deal with this situation. Let me summarize: (1) we will start offering fields in experimental in place of the ICES program- (2) all students are now subject to the requirement of two field exams before advancing to candidacy- (3) ICES students who have not yet advanced to candidacy can petition me for exemption by demonstrating both that their committee formation is at hand and that everyone involved is convinced that the dissertation will be defended before the
departure of the ICES faculty.

By way of one final remark while I am thinking of it, let me also say that I subject all requests for exceptions, exemptions, appeals, and the like to rigorous scrutiny. The simple economics of this situation is that I bear the costs of these actions, and in two respects: (1) there are supporting documents I must prepare at the time and (2) there is even more work I must bear in the form of even more documentation if you don&#8217-t conform to the initial promises.

Doing the latter is something I dislike especially intensely, and to avoid having to do this is the reason I apply rigorous scrutiny to all such cases in the first place. If I carry forward your case to higher authorities, it will only be because you have convinced me that I will never be asked to repeat that action. Therefore, do not presume that I will automatically support your petitions, for I will not do so unless you present me with compelling reason to believe that I will not again have to have such matters cross my desk.

Yours Sincerely, REW

Richard E. Wagner
Department of Economics, 3G4
George Mason University
Fairfax, VA 22030
Phone: 703-993-1132
Fax 703-993-1133
Home page: http://mason.gmu.edu/~rwagner

Previous: NOBEL LAUREATE VERNON SMITH LEAVES ROBIN HANSON’S GEORGE MASON UNIVERSITY TO GO WORKING FOR TOM W. BELL’S CHAPMAN UNIVERSITY.

NEXT: Deep Throat on the George Mason University exodus to Chapman University.

NEXT: OFFICIAL: NOBEL LAUREATE VERNON SMITH DECAMPS FOR WEST COAST&#8217-S CHAPMAN UNIVERSITY.

NEXT: The latest about the departing of Nobel Laureate Vernon Smith from George Mason University to Chapman University

This is the fourth month the simExchange video game prediction market has traded contracts on the NPD Group&#8217-s monthly sales data. This month, the simExchange expanded its contract offerings to include 10 software SKUs.

PS3 sales came in line with market expectations at 98,500 units. The simExchange market expected 98,400 units to be sold in the month of June. Sales of Nintendo DS, Sony&#8217-s PSP, and Microsoft&#8217-s Xbox 360 exceeded the market&#8217-s expectations while Nintendo&#8217-s Wii underperformed expectations. Traders likely expected a larger supply of Wii units to be shipped into the US than Nintendo was capable. The PSP&#8217-s price cut proved to be a stronger catalyst for sales than the market anticipated.

The PS3 results were the least surprising to the market (off -0.1%), while the Wii results were the most surprising to the market (off +13.62%). The PS3 futures contract was the most heavily traded futures contract on the simExchange with a total volume of 2,511,424 contracts traded. The Wii futures contract was traded for a total volume of 790,629 contracts.

Mario Party 8 lead the pack of software SKUs tracked by the simExchange, beating expectations. Microsoft&#8217-s Forza Motorsport 2 came in second, inline with expectations. Electronic Arts&#8217- Harry Potter and the Order of The Phoenix significantly underperformed market expectations.

The following tables compare market expectations on the simExchange and actual results as reported by the NPD Group. Expectations by leading analyst Michael Pachter of Wedbush Morgan are also presented for comparison purposes.

US Hardware tracked by the simExchange in June 2007

US Software tracked by the simExchange in June 2007
(Not the Top 10 software SKUs of June 2007)

How exactly does this work?

Gamers and developers sign up on the simExchange for a free trading account. Using virtual currency called DKP, players buy virtual futures contracts that are under-predicting sales and short sell
futures that are over-predicting sales. This concept is widely known as &#8220-the Wisdom of the Crowd&#8221- and this system is known as a &#8220-prediction market.&#8221-

About the predictions

Predictions on the simExchange should become more accurate over time as (1) the diversity of the pool of traders increases and as (2) more accurate players are rewarded with more virtual currency for their accuracy (thereby enabling them to form more predictions) and less accurate players lose virtual currency (thereby discounting their ability to form more predictions). Check out the simExchange&#8217-s results in May, April, and March.

Copyright and reprinting

The simExchange, LLC retains the right to the content of this article but permits the reprinting of this article with proper credit to the simExchange. Sales data published here includes data disclosed with permission by the NPD Group exclusively for the purpose of settling futures contracts on the simExchange.

This article was cross posted from NPD June sales data reviewed on The simExchange Official Blog.

* NPD Group sales data
** The simExchange trading data
*** Gamasutra, July 16, 2007