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Combinatorial Prediction Markets – by Robin Hanson
Video + Slides
Slides from Hanson’-s site – PPT file
Folks, this is great stuff. I may blog about it, again, later on —-if I find time.
You can blog about it on Midas Oracle, if you wish. Or comment on it, just below. Do register yourself.
– InTrade .NET is a play-money prediction exchange while InTrade .COM is a real-money prediction exchange. Is there an automated market maker linking the InTrade .NET prices (or bids) with the InTrade .COM prices?
– Why is it that you ask the consumers of InTrade .NET to sign the terms of use of InTrade .COM, which mentions that: “-2.2.4 You may lose money on Exchange trades.”-? – [Thanks to Deep Throat for that remark.]
– InTrade .NET has a very good charting system. Will the same charting system be implemented at InTrade .COM whose charts are absolutely awful? (See this comparison between the InTrade .COM charts and the InTrade .COM v2 charts.) I insist to say that this should be a priority.
– Will InTrade .NET have chart widgets, just like InTrade .COM and InTrade .COM v2 both have?
– Will InTrade .NET have closed contracts (which are very useful in the accuracy discussions), just like InTrade .COM and InTrade .COM v2 both have?
– Finally, it is stated on the InTrade .COM frontpage (in a text promoting InTrade .NET) that:
When Intrade.net goes out of beta it will become the new default but the current version of Intrade.com will be retained indefinitely.
How should we understand that? Does this mean that you are going to merge your play-money and real-money prediction exchanges? (Might not be a bad idea provided that full information is given on each prediction market.)
UPDATE: Deep Throat tells me that their techies are testing their new user interface on InTrade .NET, which deals with with play money, and then if everything works out well, they may implement the same user interface on InTrade .COM, which deals with real money —-while maintaining the legacy InTrade .COM on a dedicated server, for the nostalgic users.
Interesting blog post from Lance Fortnow on the VP prediction markets. (I will soon blog about those.)
InTrade – Electoral Markets Map
Their brand-new widget:
As I wrote at the time, the InTrade-TradeSports websites were unavailable, last Friday, August 29, 2008, during a good part of the morning.
InTrade-TradeSports is not only an event derivative exchange, but also a webspot that non-trading people often consult to get the latest market-generated probabilistic predictions. Last Friday, in addition to the traders, many people visited InTrade just to see what their prediction markets were saying about who would be John McCain’-s pick as Republican vice presidential nominee. InTrade-TradeSports CEO John Delaney has said that that Friday saw 10 times more web visitors than any usual peak day, and that their server bandwidth was not large enough to cop with all solicitations. It is well known in the media business that servers should be configured many times bigger than for the normal usage —-so as to accommodate exceptional peak times, when some impacting news break. My sentiment is that the InTrade-TradeSports technical team has probably not fully anticipated the growth of the InTrade-TradeSports followers.
As the result of this black Friday, some traders complained. One trader (Todd) started a thread on the InTrade e-mailing list. Unfortunately, Todd spiced his message with sarcasm. Which immediately irked John Delaney, who responded to the complaint, but also added a twisted line in effect inviting Todd to close his InTrade account.
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That remark offended another InTrade-TradeSports trader (Lucy Vega), who talked back to John Delaney:
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BetFair and InTrade-TradeSports are de facto monopolies (with 95% of the total business on their geographical zone, according to my estimation), and their direct competitors have far less liquidity, thus making them uninteresting for the big traders like Todd.
If John Delaney were really sincere in his wish to see the US public prediction market industry becoming legalized and experiencing a big growth in the coming decade, he should refrain from making offending remarks to his customers —-even when those clients started the feud with some sarcasm of their own. This kind of bullying behavior could attract the attention of the US regulators in a negative way, which is exactly the reverse of what is needed at this time.
I can understand that John Delaney is sometimes upset by some of his ultra-demanding and sarcastic customers. However, as I said, the real-money prediction exchanges are in a situation of being de facto monopolies, where their market-generated information is of high social utility, which creates a social responsibility for the executives and managers of these prediction exchanges. You don’-t insult and castigate a blogger who exposes a scandal. You don’-t censor the CNBC reports. You don’-t ask a complaining customer to close his / her account. All those things are big no-nos.
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UPDATE
I am re-publishing an old post of mine, as an appendix, to respond to some comments:
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Dan Laffan of InTrade has just given me permission to republish his e-mail(s) to Todd Griepenburg:
Todd,
We will absolutely not continue to be part of or facilitate any further diatribe with you on these issues.
If you are not satisfied that we
1. Have listened to your comments
2. Have replied to same and
3. Will take or have taken whatever corrective action is within our power and/or appropriate
then we reluctantly suggest that you consider closing your account on the exchange (or cease using it until our service meets your expectations). We say “reluctantly” as we do not wish to see any member leave, but we seem to be causing you immense dissatisfaction which is not our intention.
We will promptly close your account and return any funds you have in your account at your request. We await your decision and instruction.
Best regards,
Dan
Previous: A Big Trader’s Open Letter to TradeSports-InTrade + Second E-mail to InTrade-TradeSports + Third E-mail to InTrade-TradeSports + InTrade-TradeSports to Todd Griepenburg: GO TO HELL.
Dan Laffan to Todd: #1 – #2
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UPDATE #2
For the full information of my readers, InTrade-TradeSports’-s behavior is not the worst behavior that a prediction exchange can have towards an annoying customer. I am aware of another real-money prediction exchange who does close the accounts of the customers whom they view as problematic (and that, without citing any reason) —-as opposed to just asking somebody to leave.
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UPDATE #3:
Todd’-s new message to John Delaney
Hilarious.
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I will soon publish a full post on the relative accuracy of the VP prediction markets (and whether the prediction markets are useful at all, taking into account the occasional upsets theorized by Koleman Strumpf) —-tackling Paul Kedrosky, Felix Salmon, and Barry Ritholtz.
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Now, back to the PM-bashing Paul Kedrosky post:
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Paul Kedrosky criticizes the “-boosters”- of the prediction markets —-Justin Wolfers, Robin Hanson, John Delaney, Chris Masse, etc.
As for me, I dislike opportunistic bloggers and venture capitalists like Paul Kedrosky who approach the prediction markets without a basic understanding of the forecasting approach.
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Here is the explainer that I have been publishing on the frontpage of Midas Oracle, for all to see.
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Prediction markets produce dynamic, objective probabilistic predictions on the outcomes of future events by aggregating disparate pieces of information that traders bring when they agree on prices. Prediction markets are meta forecasting tools that feed on the advanced indicators (i.e., the primary sources of information). Garbage in, garbage out…- Intelligence in, intelligence out…-
A prediction market is a market for a contract that yields payments based on the outcome of a partially uncertain future event, such as an election. A contract pays $100 only if candidate X wins the election, and $0 otherwise. When the market price of an X contract is $60, the prediction market believes that candidate X has a 60% chance of winning the election. The price of this event derivative can be interpreted as the objective probability of the future outcome (i.e., its most statistically accurate forecast). A 60% probability means that, in a series of events each with a 60% probability, then 6 times out of 10, the favored outcome will occur- and 4 times out of 10, the unfavored outcome will occur.
Each prediction exchange organizes its own set of real-money and/or play-money markets, using either a CDA or a MSR mechanism.
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Finally, for those who missed it, the great interview given by Koleman Strumpf to CNN, in April 2008.
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CNN:
FOREMAN: I’-ve got something I want you to take a look at. Look at this. It could be the price of a stock or a mutual fund. It isn’-t. It’-s the odds that a particular candidate, the red here is Hillary Clinton, who will become president of the United States. It’-s called the [prediction] market. And while supporters say it’-s no different than any other type of investment, for example, hog bellies or pork futures, or crude oil, it sure looks like gambling.
Economics Professor Koleman Strumpf is on the faculty at the University of Kansas School of Business to talk about it now. And in Las Vegas, another scholar in the art of predicting future events, Johnny Avello, the director of the Sports Book at Wynn, Las Vegas.
Let me start with you, professor. How well does this work? When people start betting online as to who’-s going to win, does it work?
KOLEMAN STRUMPF, UNIVERSITY OF KANSAS: Yes, the markets have a really tremendous track record dating back at least on the online markets to 1988. And actually earlier, there were impromptu markets that existed outside of Wall Street in the early 20th century.
These things have been around for at least 100 years or probably more. 150 years. And with maybe only one or two exceptions that I can think of, they’-ve done a just totally dead on job at forecasting.
[FOREMAN]: Long before polling existed, then you’-re saying we had betting. And there were betting lines in newspapers. And if you want to know who’-s winning the presidential race, that’-s what you looked at?
STRUMPF: That’-s exactly right. So in 1904, “-The New York Times”- reported on the front page what was going on at the Wall Street betting markets since there was no Gallup Poll that existed at that time.
FOREMAN: Johnny, why do you think that this is generally so successful compared to polling?
JOHN AVELLO, DIR. OF RACE &- SPORTS, WYNN HOTEL: Well, first of all, you are taking actual bets. And you know, each person that puts their money up is a good indication of, you know, which way they like it.
When you’-re doing polling, you know, that’-s kind of an ambiguous way of finding out who the winner is because you’-re getting a fraction of the people who you’-re actually finding out who they like. So I like to call it money versus unpredictability.
FOREMAN: You’-re saying the difference is that in a poll, somebody may say something that they believe in generally, or they think that the pollster wants to hear. But when they put money down, they’-re going to really bet on what they think is going to happen?
AVELLO: It’-s the real thing.
FOREMAN: It’-s sort of interesting when you look at these different types of polls. There’-s the In Trade system, which is out of Dublin, Ireland that’-s sort of interesting. In Trade allows people to bet actual money and large amounts of it on all sorts of outcomes all around the world.
The Iowa markets is one the people have talked about a lot. Set up by a university there. Basically the Iowa markets allow people to bet in limited amounts of money. About $500. And it’-s used simply to see how well this works for educational purposes mainly.
Professor, when we talk about these, though, why did polling ever become popular if betting works so well in telling how we would win?
STRUMPF: Well, I think a kind of —- much like today, the newspapers, the media was always uncomfortable reporting these markets. There sort of was dubious legal status and maybe some moral issues with it.
Polling for whatever reason seems to have been morally acceptable to the media. And I think as a result when Gallup came around in the late 1930s, the betting markets kind of fell by the wayside. They never of course disappeared, but I think it was sort of a moral issue, the same kind of moral issues that I think arise today in thinking about gambling.
FOREMAN: So let me ask you this, Johnny. Why do you think it’-s been so difficult this year, though? Because as far as we can tell, the betting lines have not done any better than the pollsters this year in predicting this election. It has been all over the map. And the betting has been all over the map.
AVELLO: Well, one thing to remember, Tom, is that when the book maker’-s putt
ing up a line, what they’-re trying to accomplish is divided action. So they’-re not trying to pick the winner because let’-s take for instance if the book maker put up Hillary Clinton at one to two, and she was bet from to three to win the Democratic nomination. You know, and Obama won. People would say, wow, the book maker really got killed on that.
FOREMAN: The book maker’-s not trying to predict it, but obviously, the gamblers are, the people who are betting on these things. And they haven’-t done well this time, not compared to past elections. Why do you think that is? Why is this so hard to sort out?
AVELLO: Because they’-re not always right. No one’-s right at 100 percent of the time. I would say best case. You know, I know that history has shown that the bettor has done well on this. But to be perfectly honest with you, I think if you do 60 percent, you’-ve done a great job of picking the winner.
FOREMAN: And Koleman, do you think there’-s anything unique that’-s making it harder for the betting markets to be as accurate as they had been in the past?
STRUMPF: Well, it’-s obviously a close market and opinions are changing rapidly. I just want to kind of maybe extend a little on what Johnny just said in terms of thinking about what these markets mean.
The markets give us a probability of an event occurring. So even if, for example, Obama is a 80 percent favorite in the upcoming Wisconsin primary, which he is, that still means on the flip side that there’-s a 20 percent chance that he’-s not going to win. So the markets, again as Johnny had said, don’-t – they – by sort of definition can’-t predict an upset. An upset is a surprise which people hadn’-t anticipated. So sometimes there are these quick shifts of opinion, which I —- to the best of my knowledge, there’-s no way to forecast that in advance.
FOREMAN: And this campaign has been just filled with them. Johnny, one last thing here. Any sense of where the smart money is going these days?
AVELLO: Well, let’-s say that there’-s been a shift. I believe the smart money was on Hillary Clinton early, and has shifted to Obama. But surprises do happen. And all you need to do is look at the Superbowl to find that out.
FOREMAN: Johnny, thanks so much. Koleman, as well. We appreciate you being here. And speaking of gambling, Madame Tussaud’-s Wax Museum here in Washington is hedging its bet. And that kicks off our political side show.
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Back to the PM-bashing Paul Kedrosky post.
Here’-s the sneaky, un-informed and totally biased ( 
) comment from our good friend Jason Trost (who should know better), which was attached to the Paul Kedrosky post:
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UPDATE: Portfolio + Computational Complexity
One word: FANTASTIC.
Much improved.
What remains to be improved:
I hope we will get improvement on these fronts, soon.
