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Experts trading on prediction markets

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Chris Hibbert:

Top tier sports, national elections, and Hollywood releases are all arenas in which all the information one might analyze is already pretty much public. There are many methods for predicting these outcomes, and I wouldn’t argue that prediction markets have a huge advantage in these arenas. The markets where I expect PMs to have an advantage are where there are experts who, given an incentive, could share (or discover) information that’s not already public, and where you don’t already have an enormous crowd trying to figure out the answer. Certainly it’s fun to bet on your team or party, or to develop expertise on how the public will react to particular movies, but it’s not clear to me that we get better predictions in those areas.

This is also one of my criticisms of the Servan-Schreiber paper. While I believe there are probably markets in which the availability of serious money to be won could attract people who’d be willing to spend research in order to get a better answer, NFL sports isn’t an arena where spending thousands of dollars will help you uncover facts that aren’t already in the mainstream media.

When we talk about CEO markets, or product release dates, or market penetration numbers, we’re talking about [prediction] markets in which the information isn’t already out there, and some people will spend time and effort to ferret out relevant facts for reputation (we see this often on Foresight Exchange) or money.

Who needs pundits track records when we have prediction markets?

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Emile Servan-Schreiber:

Mr. Kristof, if you want to keep yourself accountable and track the success of your predictions in the long run and in real-time, why not simply participate in a prediction market such as NewsFutures?

You could suggest that particular stocks be listed in relation to particular new stories and their possible outcomes. Then, as you invest in particular outcomes, your prediction portfolio would either grow or shrink, providing us all with an objective measure of your foresight. You could feature on your blog a widget displaying in real-time the &#8220-net worth&#8221- of your various predictions.

Other advantages of this approach would include:

– Forcing a detailed specification of possible outcomes-
– Having you compete directly (bet against) the general public-
– Measuring how much your columns can influence price movements for various predictions-
– Leading by example to show other pundits how it&#8217-s done.

There are various types of prediction markets out there, so you can pick the venue where you&#8217-d feel most comfortable:

– Play-money only, like NewsFutures– [or HubDub :-D ]
– Real betting (illegal) like Intrade-
– Charity-driven, like Bet2give.

If the idea intrigues you, please contact me at [email protected] and we can get you started right away!

Emile Servan-Schreiber
CEO, NewsFutures

Excellent.

Readers, do click on the link (which will bring you to the New York Times), and do click on &#8220-Recommended&#8221- under Emile&#8217-s comment &#8212-so that his pitch for the prediction markets will be more visible to all the people reading the comments there. Thanks. Appreciated.

Prediction markets feed on facts and expertise.

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Via Yahoo! research scientist David Pennock of Odd Head and YooPick, the dear honorable Duncan Watts:

In part because of disappointing findings such as this, an increasingly popular substitute for expert opinions are so-called &#8220-prediction markets,&#8221- in which individuals buy and sell contracts on various outcomes, such as football game point spreads or presidential elections. The market prices for these contracts then effectively aggregate the knowledge and judgment of the many into a single prediction, which often turns out to be more accurate than all but the best individual guesses.

But even if these markets do perform better than experts, they don&#8217-t necessarily do a good enough job to rely on. Recently, my colleagues have started tracking the performance of one popular prediction market, at forecasting the outcome of weekly NFL games. So far, what they&#8217-re finding is that the market predictions are better than the simple rule of always betting on the home team, but only slightly so &#8212- which, oddly, is very similar to what Tetlock found regarding his experts. Some outcomes, in other words, and possibly the outcomes we care about the most, simply aren&#8217-t &#8220-predictable&#8221- in the way we would like.

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  1. Prediction markets are not &#8220-a substitute for expert opinions&#8221-. They are a substitute for the averaged probabilistic predictions of a large group of experts polled the traditional way (by phone or by e-mail). In prediction markets, traders (who are not experts, most of the times) collect and aggregate facts and expertise at a lower cost than a poll or survey of experts.
  2. In the research cited by Ducan Watts, the prediction markets are slightly more accurate than the competitive forecasting mechanism. Well, that&#8217-s something we are used to.
  3. What Ducan Watts doesn&#8217-t say is that prediction markets integrate facts and expertise faster than the group of experts polled by his researching colleagues &#8212-for the very crude reason that it takes a certain time to survey a group of experts (be it by e-mail or by phone).

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If I can count, that&#8217-s 3 reasons why prediction markets can bring in business value:

  1. lower cost-
  2. better accuracy (relatively, and, overall)-
  3. velocity.

That said, it should be repeated that prediction markets feed on facts and expertise &#8212-so the experts remain indispensable in the general forecasting process.

No facts (e.g., political polls) &#8211-&gt- No prediction markets.

No experts (e.g., NFL prognosticators) &#8211-&gt- No prediction markets.

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Are prediction markets useful to you?

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It&#8217-s &#8220-pretty clear&#8221- that the prediction markets on political elections aggregate information from the polls &#8212-and from the political experts.

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Previously: #1 – #2 – #3 – #4 – #5 – #6

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It&#8217-s &#8220-pretty clear&#8221- that:

  1. InTrade has been over-selling the predicting power of its prediction markets.
  2. The prediction markets are information aggregation systems &#8212-not magical tools.
  3. The main benefit of a prediction market is to express an aggregated expected probability. Most of the times, this is of low utility.
  4. In complicated situations, this aggregation will contrast well with a poor reporting. In these instances, the prediction market is a useful source of information.

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Still, as noted, it was a good election for [the] prediction markets and another piece of evidence of their superiority over the pundit[s] (and at least parity with the poll).

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Dixit Nigel Eccles in a comment.

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at least parity with the poll

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I agree with the above.

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their superiority over the pundits

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What documented evidence do you have about that, mister the cocky entrepreneurial Scotsman?

John Tierney linked to that Huffington Post that listed the pundits&#8217- predictions about the total number of electoral votes that each presidential candidate would take. But I disagree with that way of predicting the electoral college and assessing these predictions. With this completely flawed method, if you are damn wrong on a state and damn wrong (in the opposite way) about another state that has the exact same number of electoral votes, then you are a bright genius worth the Nobel prize of forecasting. Gimme a break. Enough with that voodoo way of assessing predictions about the electoral college. Do the assessment state by state.

InTrade and HubDub got lucky that their 2 mistakes (so to speak, in a non-probabilistic way) on Missouri and Indiana (both with 11 electoral votes) canceled themselves perfectly. IT WAS PURE LUCK. If their 2 mistakes had been made in the same direction (say, betting on Obama with the outcome going eventually to McCain), and/or their 2 mistakes had been done on 2 very dissimilar states (say, one with 6 electoral votes and the other one with 27 electoral votes), then we would have had reporters and bloggers bashing the prediction markets for the whole month of November.

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Dont ask the experts. Ask the prediction markets. They know better.

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George Tziralis should have refined a bit the statement he made in the first video below &#8212-statement which I have slightly modified in the title above. We need inputs from the primary, advanced indicators, the experts, and the prediction markets. We need all of that. The prediction markets will never eliminate either the polls or the experts. The prediction markets come as a supplement in the mix.
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Ask Markets

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Prediction markets are forecasting tools of convenience that feed on advanced indicators.

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Why were the political prediction markets so wrong about Barak Obama and Hillary Clinton in New Hampshire?

&#8230-asks Slate&#8217-s Daniel Gross &#8212-via Mister Usability (Alex Kirtland), who needs to go and get his own gravatar.

So, I&#8217-ve been watching the action in one of the political futures markets this evening, Intrade. And the action in this prediction market has reinforced my opinion that these are less futures markets than immediate-past markets. The price movement tends to respond to conventional wisdom and polling data- it doesn&#8217-t lead them.

Throughout the day and into the early evening, while polls were still open, Democratic investors, mimicking the post-Iowa c.w. and polls, believed Obama was highly likely to be the Democratic nominee. The Obama contract was trading in the lows 70s, meaning investors believed he had a 70 percent chance of being the nominee, while Hillary Clinton contracts were in the 20s. […] At 6 p.m., this market had written Hillary Clinton&#8217-s entire presidential campaign off. At 9:30 p.m., it was calling a dead heat. What caused investors to change their minds so drastically in the space of a couple of hours? A few data points that went against the day&#8217-s prevailing conventional wisdom and polls. […]

See also Niall O&#8217-Connor&#8217-s assessment:

I am looking forward to the post New Hampshire Caucus, when all you prediction market advocates crawl out from under your stones. For the record at one point the market on Intrade and Betfair was suggesting that Obama had a 95% probability of winning the caucas- whilst Intrade had him at 77% to win the nomination.A case perhaps of both the foolery of crowds and, the market biting back.

New Hampshire will go down as the Black Wednesday of prediction markets and unless there is now objective transparent debate (as opposed to the usual biased sabre rattling) – prediction markets will be dead in the water.

My answer to Dan Gross&#8217- legitimate question and to Niall O&#8217-Connor&#8217-s snarky comment:

  1. Prediction markets are forecasting tools of convenience that feed on advanced indicators. When those advanced indicators are wrong, the prediction markets are wrong.
  2. If you prefer the polls or the pundits, your call &#8212-but polls and pundits were also wrong, this time, right? Required reading for mister Niall O&#8217-Connor: &#8220-New Hampshire&#8217-s Polling Fiasco&#8221- + &#8220-Analysis: pundits eat crow&#8220-.
  3. The ultimate forecasting tool would be a way to reverse our psychological arrow of time &#8212-so as to remember the future instead of the past. Only science-fiction writers and some imbecile ( :-D ) believe in that.
  4. The prediction market approach is to stick with the markets, on the long term. Take their successes. Take their failures. Unlike Donald Luskin and Markos Moulitsas, Chris Masse will not turn against the prediction markets when they fail punctually. What counts is the long series.
  5. My first point should be included in the prediction markets approach definition, in my view, but others (like economist Michael Giberson) might have different opinions.
  6. With respect to my first point, I bet that the prediction markets will never replace the polls as the forecasting tool of choice for political analysts &#8212-on that particular point (but not on a myriad of others), I break away from Justin Wolfers&#8217- irrational exuberance and I side with Emile Servan-Schreiber of NewsFutures (my preferred play-money prediction exchange). Prediction market reporting will have a function, indeed (as suggests Justin Wolfers), but not the dominant function.
  7. Going forward, prediction market journalism should emphasize relative accuracy (as opposed to absolute accuracy) &#8212-that is, comparing prediction markets with polls and pundits, which is what Robin Hanson has said from day one. Our good friend Niall O&#8217-Connor has difficulty to compute that, apparently. He should eat more fish. :-D

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Justin Wolfers:

“In a few years, we may regard the second half of the 20th century as the aberration in which the press used polls rather than markets to track political races,” Justin Wolfers, a business professor at the University of Pennsylvania’s Wharton School, wrote in an e-mail message. “And in the 21st century, we may return to the habits of the early 20th century, reporting on political races through the lens of prediction markets rather than polls.”

Emile Servan-Scheiber:

1) The traders themselves are the first to look at the polls to inform their trades. So the polls are here to stay.

2) Our recent experience in Western Europe seems to indicate that the superior accuracy of markets over polls when predicting elections may be a U.S. artifact that isn’t so easily reproducible elsewhere. I’ve discussed this with Forrest Nelson of IEM [Iowa Electronic Markets], and apparently, ever since the Truman-Dewey polling debacle of 1948, U.S. pollsters have adopted a policy of reporting mostly raw numbers rather than projections based on sophisticated secret formulas, so they can’t be accused of manipulating opinion. However, raw numbers are notoriously unreliable when based on small samples, and Western European pollsters never report them, preferring instead to publish projections based on historically-informed statistical formulas. What we’ve observed in France and Holland is that it it’s very hard to beat the accuracy of such projections.

[I don’t make mine Emile Servan-Schreiber’s second point, but that’s a minor.]

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InTrade&#8217-s expired prediction markets:

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New Hampshire

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The Democrats

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The Hillary Clinton event derivative was expired to 100.

Dem NH Clinton

Dem NH Obama

Dem NH Edwards

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The Republicans

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The John McCain event derivative was expired to 100.

Rep NH McCain

Rep NH Romney

Rep NH Huckabee

Rep NH Giuliani

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Iowa

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The Democrats.

The Barack Obama event derivative was expired to 100.

Dem Iowa Obama

Dem Iowa Clinton

Dem Iowa Edwards

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The Republicans

The Mike Huckabee event derivative was expired to 100.

Rep Iowa Huckabee

Rep Iowa omney

Rep Iowa McCain

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Source: InTrade

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[A more complete prediction market reporting should have included expired contracts from NewsFutures and BetFair. Sorry for that. Note that InTrade-TradeSports is the only exchange to offer a “closed contacts” section.]

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NEXT: Prediction Markets 101 + Who did best in explaining the prediction markets to the lynching crowd? + After the New Hampshire fiasco, 16 people came to defend the prediction markets, so far. + The prediction markets deserve a fair trial. + Prediction Markets = the greatest time-saving invention of this century

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