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Transparency is an Imperative, but so are Speed, Access and Understanding.

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InTrade:

Transparency is an Imperative, but so are Speed, Access and Understanding

Tuesday, Oct 14, 2008

TRANSPARENCY IS AN IMPERATIVE, BUT SO ARE SPEED, ACCESS AND UNDERSTANDING
Prediction Markets Have a Big Role to Play

Historic volatility, unprecedented coordinated bailouts, nationalizations, and bankruptcies of some of the doyennes of the financial elite are just some of the new realities we are all faced with.

Many may well be impressed with the speed and scope of the response to this crisis. I am, but it seems to me that Intrade and all in the prediction market industry have an increased obligation and opportunity to contribute to solutions in avoiding future crises.

Since Enron, WorldCom, Tyco et al and again since this crisis ignited we are being told that maximum transparency, disclosure, and better risk management tools are the answer. These solutions are exactly what prediction markets look to and can deliver.

But is something really transparent if it is buried within a 200 page document or if you need a degree in accounting to decipher it? Likewise, if the costs of producing or gaining access to the information is such that only a few benefit, is that maximum transparency and disclosure?

The Sarbanes-Oxley Act (SOX) introduced after the Enron / WorldCom debacles is considered a success by most. However, in light of recent events and comments from Henry Paulson, John Thain and even former AIG chief Hank Greenberg, who all believe SOX threatens the US competitive position in the global marketplace, it hardly seems a panacea.

This is where prediction markets can really help now and in the future. We offer real-time aggregated collective intelligence that is easy to access and interpret. E.g. recession, tax rates, unemployment, offshore drilling, OPEC actions, bank failures, etc. Prediction markets provide a single number &#8212- the probability or risk of something happening. Right now there seems to be a 75% probability that the US will be in recession in 2009.

To get the best predictive information barriers to entry for participants and providers must fall so that adoption and diversity can grow. To contribute their maximum to society (which we expect will befit Intrade and other leaders in our industry) prediction markets need to be embraced, encouraged, and considered part of a solution to managing risks and change. Only when this happens will there be such diversity and adoption that the markets can reach their full potential in aggregating information on the most important issues.

In addition to new and revised regulations, the time is right for expanded coverage of those regulations to include prediction markets and the innovative solutions they offer. If ever there was a time to embrace innovative solutions for assessing and managing risk it seems that time came before I started to write this short note.

Prediction markets are far from perfect, but they typically deliver incentivized real-time, efficient, aggregated probability estimates on uncertain future risks and events. They have never had a more important role and potential than right now.

I welcome your comments.

John Delaney

CEO

Intrade

[email protected]

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Previously: What John Delaney told the CFTC.

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InTrade CEO John Delaney states that prediction markets can prevent the next financial cataclysms. Surely. Prediction markets can also restore womens virginity, and treat mens baldness.

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John Delaney states rightfully that the prediction markets are a mechanism that aggregates information dispersed among the population. Then, he goes on at full throttle and states that prediction markets can help &#8220-avoiding future [financial] crisis.&#8221-

Jesus, Mary, Joseph, that&#8217-s quite an extraordinary statement.

John Delaney writes that crucial information is buried deep in the accounting books. That&#8217-s true, but that&#8217-s up to the financial analysts to decipher this problematic &#8212-our event derivative traders can then just pick up on what those experts conclude. The financial experts were unable to prevent the current financial cataclysm. Adding more event derivative traders and more prediction markets won&#8217-t solve any problem.

Prediction markets are only a reflection of the current knowledge of the best experts in town. At best, they are the best umpire you can get between, on one hand, the mass media or the politicians and, on the other hand, the best experts. But when nobody knows anything (or when nobody listens to Nouriel Roubini), the prediction markets are of no help.

What the prediction market industry needs right now is not an ill-informed, bragging rant.

What the prediction market industry needs is a way to discriminate between accuracy and utility.

What we need is more of Robin Hanson.

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UPDATE:

Max Keiser is going to practice (an entertaining form of) prediction market analysis for BBC World News.

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Max Keiser:

CAUGHT OFF GUARD BY GLOBAL FINANCIAL MELTDOWN? NOT IF YOU HAD WATCHED THE ORACLE!

Max Keiser looks into the future every Friday on BBC World . . . coming soon

BBC World News is working with Max Keiser, the creator of the Hollywood Stock Exchange, to produce &#8220-The Oracle,&#8221- a weekly entertaining look into the future with the help of today&#8217-s headlines and prediction market charts.

The Oracle&#8217-s partners include Eldorado Pictures, the production company of Emmy award winning star, Alec Baldwin.

BBC World News Head of Programmes, Paul Gibbs, says: &#8216-If Max had been on our screens a year ago the current global financial crisis would not have been a surprise. It might not even have happened.&#8217-

Alec Baldwin, who has enjoyed a relationship, both personal and professional, with Keiser for nearly 30 years says, &#8220-I&#8217-m excited to be working with Max on The Oracle. Keiser combines blazing intellect, total irreverence and searing honesty to put forth news and commentary like no one else can.&#8221-

The Oracle is planned to air every weekend from early 2009 on BBC World News. Celebrity and expert guests join Max to pore over the prediction market charts to see where people are predicting today&#8217-s news might lead.

Max Keiser, has a long and amazingly accurate history of looking at market prices in order to predict the future.

As the creator of the world&#8217-s first prediction market, the Hollywood Stock Exchange, Max presented &#8220-Rumble at the Box Office&#8221- for NBC&#8217-s Access Hollywood accurately predicting box office.

Max went on to predict the present economic turmoil in a series of ten films for the Aljazeera English magazine series, People and Power.

As early as 2006, Max predicted in these films –

* the crisis in the global banking system to be triggered by subprime debts,
* the rescue of the financial system by wholesale government intervention,
* the rise in the price of gold,
* the Russian invasion of Georgia,
* economic meltdown in Iceland,
* and more.

Max continues to stay one step ahead of the game with his weekly radio show in London on Resonance 104.4 FM and in his writing for the Huffington Post and Intrade, the prediction market site.

The producers of the program will be in Mipcom and available for meetings.

InTrade should ditch their prediction markets on the InTrade prediction markets, and run a continuing series of 5-minute prediction markets instead.

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I don&#8217-t like the concept.

It has received criticism.

I don&#8217-t spot much volume.

I think that TradeFair&#8217-s 5-minute prediction markets are based on a much, much better concept and usability.

Time for John Delaney to act decisively. There is a reason the trash can was invented: to ditch the bad products.

InTrade has surpassed BetFair and TradeSports (and the Iowa Electronic Markets, too).

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InTrade&#8217-s PageRank is now 7 / 10 &#8212-while all the other major prediction market firms are at 6 / 10.

  1. It shows that the prediction market approach is paying off. Do provide journalist-friendly objective probabilistic predictions (expressed in percentages &#8211-not those fucking decimal odds), and the media will link to you, thanks to all the free-market economists who love your model and act as unpaid publicists for you. Make sure your website can resist under heavy traffic loads on Election Day, and during the occasional days where important news break. Then, milk out all this free publicity. Run registration ads allover your exchange website to attract new traders. Make money. Invest in IT &#8212-but don&#8217-t let the IT maniacs complicate your prediction exchange too much (as BetFair did).
  2. Long-term, the InTrade model (based on the prediction market approach) should be more profitable, in theory. Because of legal impediment, InTrade is not as profitable as it should be, alas.

Are we witnessing manipulation attempts on the Florida prediction market at InTrade?

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Florida went blue around 8:51 PM, on September 26, 2008&#8230- for a brief period of time:

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The Democratic side:

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Tip via Lance Fortnow

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Previously:Is InTrade being manipulated?

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UPDATE: See Jason Ruspini&#8217-s expert analysis in the comment area.

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As Justin Wolfers noted, maybe there are today bigger practical obstacles to prediction market arbitrage.

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– Legal restrictions for US traders on foreign prediction exchanges (BetFair, etc.)-

– Transaction fees (you would need to operate on 2 exchanges)-

– Currency risks and cost for hedging on that.

Eric Crampton (a Canadian exiled in New Zealand) says he has managed to turn a buck, though, by arbitraging between InTrade and iPredict New Zealand. He also makes 2 theoretical points. Go read it.