Category Archives: Analysis (Industry)

Prediction Market Industry Association = useless, so far

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We have witnessed a backlash against the prediction markets just after the Hew Hampshire fiasco. Some bloggers and journalists picked on the prediction markets (InTrade, that is), even though both the polls and the pundits were awfully wrong too. [*] Here are the persons who participated in the pro-PM side of the debate:- Robin Hanson at Overcoming Bias (the best pro-PM piece so far, although his phrasing is a bit too long and a bit too complicated for the average citizen)-

– Justin Wolfers in the Wall Street Journal (who did not convince Felix Salmon, who in tun did not convince me :-D )-

– Chris Masse at Midas Oracle (see Tim Harford&#8217-s new post to discover how irrational Chris Masse really is :-D )-

– Jason Ruspini in a comment here-

– Caveat Bettor on Caveat Bettor–

– and John Tierney in the New York Times (a special case I&#8217-ll blog about soon).

[UPDATE: Jonathan Kennedy.]

[UPDATE: Mike Giberson.]

[UPDATE: Eric Zitzewitz.]

[UPDATE: Cass Sunstein.]

[UPDATE: Steve Roman,]

[UPDATE: Nigel Eccles.]

[UPDATE: The Everyday Economist.]

[UPDATE: Adam Siegel of Inkling Markets.]

[UPDATE: George Tziralis.]

[UPDATE: Leighton Vaughan-Williams.]

[UPDATE: Emile Servan-Schreiber of NewsFutures.]

[UPDATE: “Thrutch“.]

[UPDATE: Panos Ipeirotis.]

[UPDATE: Sean Park.]

[UPDATE: Lance Fortnow.]

[UPDATE: Jed Christiansen.]

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[*] For why the polls were wrong, see: The New York Times, Zogby, Rasmussen, Gallup&#8230- [Thanks to Emile Servan-Schreiber of NewsFutures for one link.]

The answer to any anti-prediction market backlash is quality, impartial, exchange-independent, science-based, diligent, pro-PM blogging.

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No GravatarIs John Delaney the greatest psychic of all times (past, present, and future)?

Deep Throat is very impressed by how accurate the InTrade-TradeSports CEO&#8217-s 2005 prediction turned out to be. According to Deep Throat, the great Irish oracle &#8220-accurately predicted back in early 2005 in a PM conference in NY that someday the markets will make a horribly wrong prediction and that the [prediction market] industry will take a lot of s**t for it.&#8221-

Hummm&#8230-.

Deep Throat is easily impressed. What about the prediction below, then:

  • One of these days, a powerful hurricane will land in one of the southern states, and make billions of dollars in damage.

Vague and obvious predictions are of little help, here. An interesting thought to have, collectively, is how to prepare well in advance to counter such a backlash &#8212-as it is sure to happen again in the coming years. Due to the readers&#8217- new behavior (using the Web to get their info), the conversational aspect of the Web (comments, bloggers responding to their peers), and the velocity of the bloggers (tempests in tea cups spread over one or two days, and then the bloggers move on), the answer is quality, impartial, exchange-independent, science-based, diligent, pro-PM blogging.

You will note that InTrade-TradeSports, BetFair, NewsFutures, and the other PM firms, are completely absent from the dialogue between anti and pro PMs. The BetFair blog has not published anything about the New Hampshire fiasco, and the InTrade bulletin has only put in writing, on a post, the post-NH market-generated probabilities &#8212-without adding any bit of analysis. Totally pointless and useless corporate publications.

As for me, I have worked hard to put our group blog, Midas Oracle, on the blogging scene. I will further this endeavor and announce new initiatives in the future &#8212-if I am able to do so.

Previous blog posts by Chris F. Masse:

  • NUCLEAR SCANDAL: HubDub allow their traders to bet on celebrities’ death.
  • APRIL FOOL’S DAY: This year, again, CNET makes fun of the wisdom of crowds.
  • Play-money prediction exchange HubDub is a phenomenal success.
  • BetFair Australia’s spin doctor tells all about their payments to the horse race industry.
  • Meet Jeffrey Ma (at right on the photo), the ProTrade co-founder, and whose gambling life is the basis of the upcoming movie, 21.

InTrade are aware; BetFair are not.

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No GravatarDavid Pennock, the Yahoo! research scientist, in April 2007:

One of the great things about InTrade (recently split from TradeSports) is that they are open to suggestions from wide-eyed academics. [&#8230-]

Exactly.

Previously: The London School of Economics chose InTrade-TradeSports over BetFair-TradeFair for floating event derivatives on global warming.

Previous blog posts by Chris F. Masse:

  • If Midas Oracle were to meet, would we use Huddle, and why?
  • WORLD’S SUCH A SMALL PLACE: Smarkets meet HubDub.
  • 50% of our prediction market luminaries have a MacBook.
  • STRAIGHT FROM OUR TRUISM DEPARTMENT: Money buys happiness.
  • Ron Paul (R) and Barney Frank (D) ally together to attack “the practical hurdles of the federal law, known as the Unlawful Internet Gambling Enforcement Act, rather than its legitimacy”.
  • Clicking on the “SPHERE: RELATED CONTENT” button, at the bottom of each Midas Oracle post, will bring you a list of external webspots.
  • FRIGHTENING: Jed Christiansen’s prediction market blog was briefly overtaken by web spammers, who inserted invisible links to their commercial sites so as to game the Google PageRank system.

Do sports prediction markets corrupt sport? No.

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Mark Davies (&#8221-managing director of corporate affairs at BetFair&#8221- = their spin doctor) in The Guardian:

Does the existence of betting exchanges corrupt sport?

NO

In the world of finance, it has always been far easier for employees to have a negative impact on a company&#8217-s share price than a positive one. Even a chief executive would be hard pushed to cause a price rise on any given day, but anyone with physical access to the company can very easily cause a fall. No one would suggest people should only be able to buy shares, and not sell them. Instead, regulators ensure that sanctions against corruption tip the balance heavily against trying it. Make the penalty draconian, and you deal with corruption at its heart.

Betting on sport is no different. The only people who can corrupt sport are those taking part – a fact unchanged by the existence of betting exchanges. If you prevent people from succumbing to the temptation, would-be corrupters have no one to help them . You and I cannot rig a race just because we can bet against its outcome: we need someone who can affect the result. If that person might lose a livelihood, would they risk it for a fast buck?

Attack corruption at source, and it does not matter where the bet was placed. Nevertheless, some still long for the days when more traditional bookmakers held every card (an interesting notion considering what has historically been their dubious reputation)- others prefer a Tote monopoly- and some believe that banning bets against outcomes would constrain corrupters.

This series of arguments is based on the naive belief that a black market does not exist. This is absurd. Asian syndicates behind apparently rigged football matches (like those who turned floodlights out at grounds in the late 1990s) are no more dependent on Britain&#8217-s legitimate market than Colombian drugs barons are on sales of aspirin at Boots. The difference between legal, regulated, transparent betting – nowhere more so than on the leading betting exchange [= BetFair], where every transaction is open to scrutiny from 29 different sporting regulators – and the murky, illegal market, is the difference between chalk and cheese.

Black markets thrive where legal ones offer poor value. Now that the exchanges offer the best value, those previously tempted by odds on the black market are returning to the legal fold. Corruption-free sport comes from total transparency. The exchanges are the only part of the market that offer it. People get hung up on &#8220-betting to lose&#8221-.

Leave aside the obvious: bets to win (most clearly demonstrated in two outcome sports like tennis or snooker) are direct bets on the opposite outcome to lose. &#8220-Betting to lose&#8221- is just betting at value: if the price unfairly reflects the realistic chance of something happening, why should you not bet against it?

Value bets, placed for or against, are perfectly legitimate- acting to impact a given outcome adversely is corrupt. But banning the former through fear of the latter is like banning cutlery because some people use knives to harm. It is not the knives doing the damage, but the criminals using them. Legal betting does not corrupt sport- people do – and they are more likely to do it when they think they w ill not get caught. Measures to protect sport are not best aimed at open, transparent, and audited betting markets but through its participants, where the corruption can occur.

Excellent.

TradeFairs David Jack = the $20 million man

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Hidden this morning deep into The Sunday Times:

Betfair, the online sports-betting firm, has invested ?10m to launch Tradefair, a new subsidiary company specialising in bets on the financial markets. It believes that the market for financial betting could exceed ?400m. [*] Tradefair will operate independently of its parent. [**]

?10 million = $20.3 million = €13.9 million &#8212- [Thanks to David Pennock’s Yahoo! Currency Converter. :-D ]

[*] BetFair and TradeFair traders share the same BetFair account, as I understand it.

[**] I suppose (based on BetFair&#8217-s share of the UK betting market) that TradeFair wants 5% of that (for a start) &#8212-so that would be ?20 million. &#8212- But we don&#8217-t know what that ?400 million figure came from, in the first place. David Jack&#8217-s wet dreams? For the UK market only (in an increasingly global environment for exchanges)? For what year exactly? 2008? 2026? Mystery. Of course, no source is cited.

Previously: Binaries and Spreads: BetFair spins off TradeFair. + Meet David Jack, the managing director of TradeFair. + TradeFair Binaries User Guide – What is Trading? + BetFair’s Global Warming Prediction Markets — CFM’s Views + Why does Tradefair care about Prediction Markets – by TradeFair&#8217-s David &#8220-$20 million&#8221- Jack – 2007-12-06

BetFair traders discuss TradeFairs 0-100 trading interface.

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And conclude that that&#8217-s the way to go!!!!! – (page 2):

BinarySoft Chris 27 Nov 10:38
I won&#8217-t be one of the initial MMers nope, but I may well do it at some point next year, depending on the spreads of the initial MM(s). That&#8217-s also assuming they do have a MM – launching TF Binaries without a MM would be a very unwise move! You are right that decimal odds are a bit counter-intuitive for trading – this is one of the main reasons why I developed BDI (binary-betting interface to the Betfair API) and it also means expanding it to allow support for Tradefair should be possible with very few alterations to the interface – possibly as straightforward as just displaying both BF and TF markets in the market navigation tree :)

BinarySoft Chris 30 Nov 10:32
If it&#8217-s a native binary exchange (and I suspect it is), then tradefair will remain a *separate* exchange, because the conversion from binary – decimal is not exact.

Dr Who 06 Dec 07:37
jules, BinarySoft Chris, or whoever you are, I take it you&#8217-re the guy behind BinarySoft. Just guessing of course.
Tell me, what is that nonsense on your site which says, &#8220-Binary prices are the most natural and intuitive way of expressing odds&#8221-? How can you possibly be taken seriously making a gaff like that? Why go to all the trouble to make decimal prices, which are in fact the most natural and intuitive way of expressing odds, into a completely arbitrary system like yours? When [Tradesports] started I spent a while developing an app to convert their daft Buy/Sell pricing system into decimal notation so I could arb between TS and BF. Now I&#8217-m sure there may be some city types who are used to the Buy/Sell system but to call it a &#8216-natural&#8217- or &#8216-intuitive&#8217- way of expressing odds is complete b0llox. I wish your software well but can&#8217-t see why anyone on earth would want to deviate from what is being offered on BF or Tradefair. Unless you can persaude me otherwise with an argument I haven&#8217-t thought of :)

BinarySoft Chris 06 Dec 11:40
Dr Who – I appreciate that binary prices will not be the most suitable for everyone, and also they may take a little while to get used to for people previously used to thinking purely in terms of decimal odds. However, the vast majority of the people who have made the switch to binary prices agree that thinking purely in terms of percentage chances is a faster and simpler way to trade (and also a more natural way to price any contract/market).
See this link for more comparisons:
http://www.binarysoft.co.uk/bdi/why-binary-prices.php
This states the case pretty convincingly in favour of binary prices – what advantages can you come up with for decimal odds?

BinarySoft Chris 06 Dec 11:52
Another advantage in favour of using binary prices for trading is that &#8220-buying&#8221- and &#8220-selling&#8221- are more natural ways of describing the trading process than &#8220-backing&#8221- and &#8220-laying&#8221-, especially for people who aren&#8217-t used to betting exchanges. Also, the fact that Tradefair natively uses binary prices means that Betfair appear to be in favour of this method of expressing odds (well certainly for financial bets anyway). The next version of BDI will also be able to access both Betfair and Tradefair from the same interface, with seamless switching between Betfair/Tradefair markets. Currently, users of Tradefair and (non-BDI) users of Betfair will have to keep on switching between decimal and binary odds if they wish to trade on both exchanges – it&#8217-s probably easier to just think in terms of a single way of expressing odds.

Dr Who 06 Dec 12:19
I said &#8221- My argument is that decimal notation is a much more intuitive and natural way to express [probabilities].&#8221- I&#8217-ve just read that back and frankly its complete b0llox. I&#8217-m happy to try out your interface Chris and see how it feels. I&#8217-m always happy to change my position if the facts warrant change but I found the Tradesports interface difficult.

BinarySoft Chris     06 Dec 17:04
One of the issues with that exchange you mentioned [TradeSports] is that it deals in &#8220-lots&#8221- – each lot is normally $0.10/point but it can vary for different markets and thus can get pretty confusing. Every other binary betting related product uses stakes expressed purely in terms of amount/point (Tradefair, other financial bookmakers and BDI).

Previously: BetFair officially launches TradeFair, one month exactly after it was announced on Midas Oracle, and the mugshot of its managing director published for all to see.

GUARDIAN BLOGGER: BETFAIR SPIN-DOCTOR DOES NOT SAY THE TRUTH ABOUT SPORTS CORRUPTION.

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Lawrence Donegan:

Odds-on liquidity showing interest in Scottish youth

Can it really be more than a month since Betfair&#8217-s Mark Davies appeared in print to reject the suggestion that the gambling boom is in any way responsible for the apparent increase in corruption in sport, by pointing out that dodgy dealing has been around since the days of the gladiators? Presumably, reports of 15 football matches from this season being under investigation will see Davis, like Edward Gibbon in a pork-pie hat, return to the fray with another tale from the Colosseum. Meanwhile, far from events at Anfield – figuratively if not geographically – comes news that under-21 games in Scotland are the subject of huge bets by Asian gamblers. Some might think this is a sinister development but not the Betfair spokesman, who told the Daily Record last month that the company would be happy to open a book on the youth sporting market if there was &#8220-liquidity and interest&#8221-.

With all due respect to the Guardian blogger cited above, I side with Mark Davies. See his verbatim, just below.

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Mark Davies, BetFair’s Managing Director (Corporate Affairs)

Mark Davies (BetFair’s Managing Director)

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Mark Davies interviewed by The Daily Telegraph (in October 2007):

[Tennis] has always been liable to corruption.

I think that all sport has always been liable to corruption, by the very nature of it producing clear results one way or another. They say that chariot races were rigged for financial reward. I don&#8217-t see why subsequent sporting events should suddenly have been less liable to corrupt practice. We would strongly dispute the idea that sport suddenly has a corruption problem because of the boom in gambling.

The amount of money bet in the legal market may have grown — who knows if it has risen or fallen in the illegal one? — but the number of people who can be tempted by that money and use it for corrupt reasons is the same as it always was.

PIECE OF EVIDENCE #2 THAT BETFAIR-TRADEFAIR ARE MINDING THE PREDICTION MARKETS.

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TradeFair Binaries:

TradeFair Prediction Markets

Hint: A binary bet represents the probability or percentage likelihood of an event happening. In the example above the price is 66 to sell and 67 to buy. You should buy if you think there is a greater than 67% likelihood of the event happening OR sell if you think the probability is less than 66% likelihood of the event NOT happening.

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Thank you, Eric Zitzewitz and Justin Wolfers (among others).

Interpreting Prediction Market Prices as Probabilities – (PDF – Abstract) – by Justin Wolfers and Eric Zitzewitz – 2005-02-01

While most empirical analysis of prediction markets treats prices of binary options as predictions of the probability of future events, Manski (2004) has recently argued that there is little existing theory supporting this practice. We provide relevant analytic foundations, describing sufficient conditions under which prediction markets prices correspond with mean beliefs. Beyond these specific sufficient conditions, we show that for a broad class of models prediction market prices are usually close to the mean beliefs of traders. The key parameters driving trading behavior in prediction markets are the degree of risk aversion and the distribution on beliefs, and we provide some novel data on the distribution of beliefs in a couple of interesting contexts. We find that prediction markets prices typically provide useful (albeit sometimes biased) estimates of average beliefs about the probability an event occurs.

Previously: BetFair’s Global Warming Prediction Markets — CFM’s Views – Out of their 3 event derivatives on global warming, the first two, at least, are flawed products.

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How Google ranks the software providers of enterprise prediction markets

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[InTrade is #1 but their software is not yet available for enterprise prediction markets, as I understand it.]

#1. NewsFutures

#2. Inkling Markets

#3. Consensus Point

#4. Zocalo

#5. HSX Research

Source: The Google Search ranking of the &#8220-prediction markets&#8221- webspots&#8230-

External Link: Jed Christiansen&#8217-s review of the software providers of enterprise prediction markets. (I will take a deeper look to it at a later time, and will maybe blog about it.)

Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages

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Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages

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Based on that book by Carlota Perez, the blogger at The Park Paradigm says that BetFair is a 6th-paradigm company.

In her model, the world has experienced five technological revolutions and “techno-economic” paradigms in the modern era, starting with the Industrial Revolution in the late 18th century, through to the current end of 20th century paradigm – the Age of Information and Telecommunications. So what happens when we look past the present age to the next – the sixth – techno-economic paradigm? What are the new and emerging opportunities that will present themselves in this “sixth paradigm”? Have we already witnessed the innovation that will lie at the heart of the sixth paradigm or is it still ahead of us? Will the sixth paradigm be the “Age of Markets”?