The movie “-Babel”- seems quite hot at HSX for the Oscar of the Best Picture…- and not so hot at TradeSports. Since HSX’-s track record is quite impressive regarding Oscars predictions, I would use HSX info to speculate at TradeSports.
Agree, disagree?
There’-s a set of Robin Hanson slides that are much more interesting than the presentation he gave at Yahoo! Confab.
– It’-s bigger (67 slides vs. 21) and it covers the prediction market problematic in a more comprehensive way (including MSR).
– The decision market concept takes a minor place, whereas at Confab, Robin Hanson made the mistake to focus most of his speech on it —-interesting concept but that was the wrong audience (Confab attendees wanted specific answers about basic prediction market questions).
– Here are excerpts, but I recommend you to download the presentation file, read it from A to Z, and share it with your friends and colleagues. (And if you had downloaded his Confab slides, direction the trash can of your computer –-don’-t keep 7 megas of useless bits of information.)
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Prediction Markets for Science? – (PPT) – by Robin Hanson – 2006-12-XX
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Today’s Science Prices (Play $ Alas) – [Foresight Exchange]
11-14% P != NP proven by 2010
16-18% Cancer cured by 2010
16-19% Cold fusion works by 2015
28-29% Mammal immortality by 2015
28-31% Eventual universe collapse
68-70% Fusion energy sold by 2045
74-76% Extraterrestrial life by 2050
91-95% A gamma ray burst w/in 33Mly
93-95% Cosmo constant >- 0
93-96% Neutrino mass >- 0Science Decision Markets
E[ Iraq civil war | US moves troops out? ]
E[ Sea levels | Raise CO2 tax ]
E[ Lifespan | Health care reform ]
E[ Murders | More gun control ]
E[ Cancer deaths | More research funding ]
E[ Firm stock price | fire CEO? ]
E[ Succeed? | Fund project ]
E[ Publications | Hire candidate ]
E[ Citations | Publish ]Theory I – Old
“Strong Efficient Markets” is straw man
No info – Supply and Demand
Assume beliefs not respond to prices
Price is weighted average of beliefs
More influence: risk takers, rich
Info, Static – Rational Expectations
Price clears, but beliefs depend on price
No trade if not expect “noise traders”
Price not reveal all info
More influence: info holdersTheory II – Market Microstructure
Info, Dynamic – Game Theory
Example – Kyle ’85
X – Informed trader(s) – risk averse
Y – Noise trader – fool or liquidity pref
Market makers – no info, deep pockets
If many compete, Price = E[value|x+y]
Info markets – use risk-neutral limit
If Y larger, X larger to compensate more info gathered, so more accuracy!Theory III – Behavioral Finance
Humans are overconfident
Far more speculative trade than need
Mere fact of disagreement shows
Overconfidence varies with person, experience, consequence severity
Implications
Price in part an ave of beliefs?
Adds noise to price aggregates?
Prices more honest than talk, polls, …Ask the Right Questions
Cost independent of topic, but value not!
Seek high value to more accurate estimates!
Relevant standard: beat existing institutions
Where suspect more accuracy is possible
Suspect info is withheld, or not sure who has it
Prefer fun, easy to explain and judge
Prefer can let many know best estimates
Not fear reveal secrets, use fear to motivate
Avoid inducing foul play
Eight Design Issues
How avoid self-defeating prophecies?
How handle billions of possible combos?
What if terrorists lose $ to mislead us?
What if terrorists gain $ by give us info?
How not alarm public, inform terrorists?
Price can mislead if deciders know more.
Will markets induce people to lie?
Will markets help employees embezzle?
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Thoughts About “-Decision Markets”-:
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#1. Robin Hanson first wanted to apply his decision market concept to refine the democratic process —-”-vote on values but bet on beliefs“-. He calls that “-futarchy”- (PDF) —-as far as I can see, only some libertarian wackos like Chris Hibbert or Peter McCluskey bought the idea. (I’-m not even sure his paper was accepted somewhere for publication.)
#2. Now, Robin Hanson tries to plug his decision market concept as a management decision tool —-here’-s from his Confab presentation:
Decision Market Applications
E[ Revenue | Switch ad agency? ]
E[ Revenue | Raise price 10%? ]
E[ Project done date | Drop feature? ]
E[ Project done date | Add personnel? ]
E[ Stock price | Fire CEO? ]
E[ Stock price | Acquire firm X? ]
The guy doesn’-t have the slightest chance that his envisioned applications see the ray of light, one day (that is, before his head gets chopped off and frozen, shortly after his death). Basically, he wants the senior executives to be replaced with a market-generated automatism. Even if he can prove that it would lead to lead to better management decisions (and I trust him on that), he’-ll encounter entrenched resistance from the same people his decision tool was created to compete with. I’-d short-sell Robin Hanson on that one —-with all my might, and I’-d bet George Soros would see an opportunity here.
#3. The only chance the guy has would be to dig the field of management science for areas where a series of micro decisions are taken by mid-level executives or technologist or scientists or other employees —-but NEVER by senior executives. In that perspective, all the examples of applications he gave above are worthless —-direction the trash can of your computer (and select “-empty the trash can”-, to make sure they disappear for good.)
#4. Robin Hanson (who is a bright inventor) is totally incapable of seeing the light of what could be a successful innovation. The only chance the guy has would be for him to network with Silicon Valley’-s geeks-turned-IT-executives, and, after a series of of pitches, maybe he would get feedback from someone who can find a mutant idea —-an idea that is original, almost bizarre- an idea nobody ever thought of before. Robin Hanson, on his own, is totally incapable of thinking creatively in terms of innovation —-he likes big ideas but he doesn’-t get people and marketing (including internet usability). Which is why I’-m suggesting to him to go West and to find his complement(s) there. That’-s his only chance.
Prediction Markets, Decision Markets, and More – (PPT) – by Robin Hanson – 2006-12-13
– All speculation is “gambling”!
– In direct compare, beats alternatives – (Vs. Public Opinion – Vs. Public Experts – Vs. Private Experts)
– Advantages – (Numerically precise – Consistent across many issues – Frequently updated – Hard to manipulate – Need not say who how expert when – At least as accurate as alternatives)
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What’-s above is about “-prediction markets”-. Now, below, here are possible instances of “-decision markets”- (a more complex form of prediction markets, structured to be a decision tool, not jut a forecasting tool):
Decision Market Applications
E[ Revenue | Switch ad agency? ]
E[ Revenue | Raise price 10%? ]
E[ Project done date | Drop feature? ]
E[ Project done date | Add personnel? ]
E[ Stock price | Fire CEO? ]
E[ Stock price | Acquire firm X? ]
CFM hated it when Peter McCluskey wrote:
What many of us want from prediction markets bears more resemblance to the products of think-tanks than it does to any other institution that I’-m aware of
But this reminds me of something. When has a pro-market think tank ever subjected its policy recommendations to market evaluation? Never, as far as I know.
The Independent Institute published a book chapter on Decision Markets by Robin Hanson in Entrepreneurial Economics. When institute Research Director Alexander Tabarrok gave a talk on the book, you can guess what subject he spent the most time on.
Think tanks that talk about prediction markets (AEI-Brookings is another) should walk the walk, as should institutions that laud the rigors of the market generally. This could involve setting up and running a non-profit exchange or paying Intrade to offer certain contracts, or variations between.
Many think tank proposals have virtually no chance of implementation. These would not be ideal candidates for prediction market evaluation, but not all think tank prescriptions are politically impossible, and much of what think tanks do is critique proposals that do stand real chance of implementation. If the choice is between yet another Op-Ed and a contract on the subject, I’-ll take the latter.
I’-ll make a $500 donation to the first think thank that makes an interesting, non-bogus use of real-money prediction markets before the end of 2007. I’-ll be the judge of bogosity and interestingness, but I can say that a paper about prediction markets counts as uninteresting.
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A grouping that loves to talk about markets (that is when they’-re not going off on incoherent rants) but hates any sort of evaluation consists of U.S. Libertarian Party candidates, activists, and donorsfools. Each election there are LP candidates who vigorously argue that they have a good shot at winning significant office or at least obtaining millions of votes in the case of the U.S. Presidency, ignoring 35 years of abject failure.
The case of Michael Badnarik’-s “-campaign”- for U.S. Congress ending last month is a hilarious case in point. He raised over $400,000, claimed he could win, and got …- 4 percent of the vote. He’-s now begging for another $200k and it turns out his “-campaign”- “-manager”- is starting his own Scientology-like religion.
That’-s not all that out there for an LP campaign, nor is it surprising–-there is no competition from non-wackos for candidacies that are doomed to failure.
One LP campaign this cycle that didn’-t appear to be crazy but nevertheless radically overestimated its chances of success was that of Bob Smither, running in Tom DeLay’-s GOP district against a Nick Lampson, a Democrat ex-Congressperson (who won easily) and a write-in Republican. Because the TX-22 race this year was unusual it was one of several seats Intrade ran markets on. The Intrade market included DEM, GOP, and FIELD contracts. FIELD could be taken as representing Smither, so this may have been the very first LP candidacy evaluated by traders. (FIELD exists in most Intrade election outcome markets but typically attacts no trading, as the field hasn’-t a snowball’-s chance in hell.) Their evaluation was not kind, as I pointed out in a blog post and several times in comments on a blog (no longer live) that hyped Smither’-s chances, where I goaded fans to place bets. Smither polled 6%, against 51% for the Democrat and 43% for the write-in Republican.
One doesn’-t need a prediction market to see that LPers are delusional, amnesiac, or just plain stupid. But as someone with strong libertarian sympathies (actually like prediction market legal scholar Tom W. Bell I’-d prefer to take back the word liberal) I’-ll gladly take additional opportunities to rub the facts in the face of my embarrassing and hypocritically scared-of-markets fellow travellers in the LP.
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Did I say baiting? Oops, I meant betting!
Three years after the Policy Analysis Market proposal’-s untimely and tragic abortion has analysis of probable policy consequences improved at all? If reports on the Iraq Study Group are any indication, the answer is no. I gather a group of commissioners and their staff chatted with a number of supposed experts over many months and eventually churned out a long list of plausible sounding recommendations with zero attempt to quantify probability or size of the consequences of those recommendations. The report itself, which I have only skimmed, contains 39 instances of the word could, 34 of the word would, one of the word prediction:
These and other predictions of dire consequences in Iraq and the region are by no means a certainty.
Awww, that’-s nice. And one of the word probability:
But there are actions that the U.S. and Iraqi governments, working together, can and should take to increase the probability of avoiding disaster there, and increase the chance of success.
Note that the report isn’-t assigning probability, rather asserting someone should take care to increase the probability of a good outcome!
The report’-s analysis of four often advanced policy courses (Section I(C): withdrawal, stay the course, more troops, devolution) consists of a string of cheap assertions.
…-
Unfortunately no private sector prediction market has stepped in to fill this vacuum.`A little over two weeks ago as speculation about the ISG and potential changes in U.S. policy ramped up I looked for prediction markets relevant to Iraq and found three, all play money, one at each of FX, Newsfutures, and WSX. Unfortunately all are concerned with U.S. troop levels or deaths and none are conditional on other events.
So I created a market on Inkling with four stocks: will the Iraq Body Count increase by 40,000 or more from May through December of 2007, conditioned on whether U.S. troop levels fell below 100,000 in April 2007.
The latter will be judged based on the outcome of the Newsfutures contract USLEAV07. It seemed to make some sense to condition on an existing contract which already had some history and volume. As far as I know this is the first time a contract on one prediction market site has been conditioned on the outcome of a contract on another site. Not that it matters. This market was not a rare jewel, but an utter failure.
The market has attracted a total of two traders have made two trades, leaving prices almost exactly at their starting points, while Newsfutures’- USLEAV07 has fallen by over half. There’-s nearly free Inkles for the taking. Actually there are many markets at Inkling offering nearly free Inkles, including two Democratic U.S. presidential nomination markets with sharply different prices for some candidates, but apparently nobody wants Inkles.
Links to Iraq-related markets referenced above are at my personal blog.
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If I create a play money market again I shall do so on FX, which at least has a base of knowledgeable traders, some of whom are fairly motivated to improve their FX score. I make an exception for playing with new sites.
Like our host I would like to see more (any!) socially relevant real money prediction markets. Over a year ago Masse said the solution is always ‘-better marketing’-. Slightly less than a year ago he said The key to more socially relevant prediction markets is better marketing. Stay tuned, folks.
I’-m not certain that marketing is the critical piece (Tradesports hasn’-t really tried “-if you build it, they will come”- though this hasn’-t entirely stopped academics from using prediction and other market prices and fortuitous circumstances to make some socially relevant inferences), but it couldn’-t hurt when combined with a tiny bit of vision.
I’-m staying tuned.
Previous blog posts by Mike Linksvayer:
Scenarios for possible breakup of the European Union have been a lively discussion topic for years. So far the EU is holding together but the possibility of some kind of radical restructuring is always in the background. With the help of a couple of people who may wish to join this conversation, I hope to create prediction markets that produce reasonable probability estimates for various EU events including complete breakdown. These will not be real-money markets but I think they will be useful nonetheless. The purpose of this blog post is to solicit suggestions on how to frame EU breakup (i.e., which tradable propositions or bundle of tradable propositions should we make available to traders) and on the specific contract specifications to use in such prediction markets.
There are at least two difficult issues: 1) defining the time horizon (expiration date) for each contract and 2) defining the criteria for EU failure. Time horizon is tricky from a liquidity perspective, because the plausible failure scenarios all occur at least a couple of years from now- traders usually prefer shorter-term contracts. WRT the other issue, failure criteria, how would we define EU failure? Would it be:
– Germany/France formally withdraws by date X?
– Germany/France resumes use of its own currency by date X?
– X nations formally withdraw?
– Value of the Euro declines below some fraction of the USD?
– UK/other country does not adopt Euro currency by date X?
– Euro currency removed from circulation?
– Repeal of acquis communautaire?
– Formal end of the EU?
– Something else?
So we might have a series of contracts along the lines of, “-German govt formally withdraws from EU by 31 Dec. 2010 [2011, 2012, 2013, . . .]”-
Or we might have a range of contracts (German formal withdrawal, French formal withdrawal, UK non-adoption, etc.). IOW, instead of defining EU failure as a discrete event, we provide contracts on multiple scenarios and traders bet on whichever basket of scenarios they prefer. This approach makes more sense to me than would an attempt to define “-EU failure”- as a single event.
Based on suggestions I’-ve already received, I think the following contracts might make sense:
– Next country to drop out. There would be one such contract, with no expiration date, for each country. All contracts expire when one country drops out (expiration value would be 100 for that country and 0 for the other countries), and would be automatically recreated for the remaining countries. There would have to be a contract provision to handle simultaneous withdrawal by multiple countries, but that shouldn’-t be difficult. And of course withdrawal must be defined precisely.
– Country X adopts/rejects single currency by 31 Dec. 20XX. (Again, “-adopts”- or “-rejects”- must be defined.)
– Germany/France + one other country are last remaining EU members on 31 Dec. 20XX. (”-EU member”- must be defined.)
– Euro currency removed from circulation by 31 Dec. 20XX.
But the above contract ideas are merely first efforts.
How would you define EU failure for contract purposes? What kinds of contracts would you like to see? How to make such long-term contracts appealing to traders?
I much appreciate any suggestions. Thanks.
Since it seems that I won’-t secure any more capital on which to exploit this within the relevant timeframe, I thought I’-d complete the circle regarding the HRC attack of several days ago. (For the first half of the analysis, please read this post.)
The attack was clearly “-irrational”- and not related to release of any public information–-if not directly contrary to that day’-s information. A buyer with the sophistication of knowing the publicity power of Tradesports stats, who had learned a key piece of inside information, would have bought Hillarys much more gradually, saving himself significant dollars. However, we already established that no piece of private information could realistically justify the movement from 54.5% to 68.5%. It seems clear that the attack was “-irrational.”- But if every event is caused by something, what would cause this attack?
My answer: someone internal to the “-Run, HRC, run”- decision process wants Hillary to run, and is searching for other factors with which to convince her that she will run. So that someone, my guess is a senior staffer with some money lying around, did this so that s/he could go to Hillary and, having gone over the latest poll numbers, say, “-Oh, by the way, the market numbers [which are so impartial, of course] on your likelihood of getting the nomination are…-”- And 68.5% sounds a lot better than 54.5%. The staffer probably knew it would go down pretty quickly, but it did happen, so it’-s not a lie, even though the meaning was totally deceptive. And as the attack occurred at about 6 AM Eastern, it would be just in time for the morning briefing! (Yeah, that might be trying to tease too much out of the inference. Who knows. Right?)
Hillary is reading the tea leaves, sees her high negatives, sees her perceived and actual huge baggage, and is feeling hesitant about the whole idea. The final go-ahead to her big donors will happen sometime in December. I am sure that someone is staking big bucks trying to convince her to run. Probably a senior staffer who has a ton to gain personally and career-wise, if Hillary goes all-out. And Hillary is a lot more skittish than 55% skittish.
Addendum, again from Hotline: FNC’-s Cameron: “-The chairman of Iowa’-s Democratic party told Fox News that Mrs. Clinton has not been adequately laying the groundwork for her campaign and that first in the nation caucus goers are being told she may not run because of growing buzz over Illinois Freshman Senator Barack Obama’-s expected candidacy.”-
The plan was for Iowa Gov. Tom Vilsack to be the stalking-horse for the Iowa caucuses, and render it irrelevant. The Iowa primaries are about retail politicking, which Hillary hates. Unfortunately for Hillary, Vilsack’-s polling has been dismal, even in his home state. Which renders his run all the more irrelevant, and irrational, without ulterior motives.
A few days ago, I came across Chris’-s question concerning recession prediction:
My Question: How would you structure a US recession prediction market? (…without splitting liquidity, I mean.)
My initial response to this was:
A recession is defined as two consecutive declines in real GDP. Why not create a series of contracts, as follows:
US.RECESSION.4Q06.1Q07
US.RECESSION.1Q07.2Q07
US.RECESSION.2Q07.3Q07
…
Here are some more of the contract details:
The Expiry Price will be 100 if Real GDP declines for two consecutive quarters, and 0 if Real GDP does not decline for two consecutive quarters. Final Real GDP figures (3 months after quarter end) will be used, not the advance (one month after) or preliminary (two months after) Real GDP numbers.
The Result used to determine the expiry prices will be the official figures released by Bureau of Economic Analysis, an agency of the US Dept of Commerce.
Comments welcome and appreciated!
Prof. Bainbridge on Burton Malkiel on the efficient capital markets theory (ECMH):
The second pillar of Malkiel’-s analysis is the efficient capital markets theory (ECMH). The fundamental thesis of the ECMH is that, in an efficient market, current prices always and fully reflect all relevant information about the commodities being traded. In other words, in an efficient market, commodities are never overpriced or underpriced: the current price will be an accurate reflection of the market’-s consensus as to the commodity’-s value. Of course, there is no real world condition like this, but the securities markets are widely believed to be close to this ideal. There are three forms of ECMH, each of which has relevance for investors:
Weak form: All information concerning historical prices is fully reflected in the current price. Price changes in securities are serially independent or random. What do I mean by “-random”-? Suppose the company makes a major oil find. Do I mean that we can’-t predict whether the stock will go up or down? No: obviously stock prices generally go up on good news and down on bad news. What randomness means is that investors can not profit by using past prices to predict future prices. If the Weak Form of the hypothesis is true, technical analysis (a/k/a charting)-the attempt to predict future prices by looking at the past history of stock prices-can not be a profitable trading strategy over time. And, indeed, empirical studies have demonstrated that securities prices do move randomly and, moreover, have shown that charting is not a long-term profitable trading strategy.
Semi-Strong Form: Current prices incorporate not only all historical information but also all current public information. As such, investors can not expect to profit from studying available information because the market will have already incorporated the information accurately into the price. As Malkiel demonstrates, this version of the ECMH also has been well established by empirical studies. Implication: if you spend time and effort studying stocks and companies, you are wasting your time. If you pay somebody to do it for you, you are wasting your money.
Strong Form holds that prices incorporate all information, publicly available or not. This version must be (and is) false, or insider trading would not be profitable.
Previous blog posts by Chris F. Masse:
…- in the One Chicago’-s lingo.
As opposed to “-automated market markers”-.
My Question: Does anybody know what is the correct / most popular terminology, here?
Addendum: JC Kommer has posted a comment…-
Anybody can trade via “automated market marking”.
With its “-Lead Market Maker”- program, OneChicago sends a clear signal: there is nobody here and if you come you will get screwed because the “-Lead Market Maker”- has certain privileges such as priority in the order queue and lower fees.
Previous blog posts by Chris F. Masse: