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Robin Hansons annoying insistence on distinguishing prediction markets from betting markets

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Jed Christiansen has more on the 2007 Consensus Point conference on prediction markets&#8230-

Robin Hanson

Robin gave a quick addendum to his earlier talk, where he focused on the cost-value space of a prediction market. He described an evolution from betting markets, which have negative cost (aka profit) though little value to an organisation, to future prediction markets. Fully evolved prediction markets will certainly have a cost to operate, but the output could have tremendous value to a company.

Intro to Prediction Markets – (PPT file) – by Robin Hanson – 2007-09-24

prediction markets vs. betting markets

Political Strategy and Prediction Markets

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Strategists who want to know when a strategy is effective should pay attention to the market. Here is one losing strategy Edwards should drop:

According to Intrade.com, every time the Edwards presidential campaign (via Elizabeth Edwards) tries to engage Coulter in a catfight, his price plummets. His lowest point was after Elizabeth Edwards&#8217- &#8220-surprise&#8221- call-in to Hardball with Chris Matthews in June 2007.

Mr. Giuliani might want to check out intrade before he takes anymore calls mid-speech.

Cross posted from NastyBrutishAndTall

Should a betting exchange be a content provider, too?

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Should BetFair have acquired TimeForm (the publisher of horseracing ratings, form guides and analysis)? Niall O&#8217-Connor (a betting market expert) thinks that there is a &#8220-strategic mismatch&#8221- between the two. I&#8217-m republishing his hatchet job, below. (I hope he won&#8217-t mind that I quote him in full, this time.)

At the end of November 2006 Betfair acquired Portway Press Limited, the owner of Timeform, the world-renowned brand involved in the publication of horseracing ratings, form guides and analysis. It was suggested at the time that the acquisition had cost Betfair somewhere in the region of ?15m.

At the time of the acquisition, Betfair announced that Timeform would retain full editorial independence, but that it would bring capital investment, technology, marketing and communication skills to the table.

On publishing its results for the year ended 30 April 2007, Betfair said that Timeform had &#8220-made a small loss in its first five months of trading after acquisition&#8221- but that it was confident that it would generate positive returns in the near future.

One can only speculate as to what the strategic thinking behind the acquisition was. Presumably it was believed that an association with the prestigious Timeform brand would make Betfair&#8217-s horse racing services more creditable- whilst at the same time affording cross-marketing opportunities.

Flawed logic at best&#8230-.

First, it is widely acknowledged that Betfair has given rise to, and nurtured, a culture of trading. Betfair traders do not typically run to form books, but rather, they let the Betfair market guide them, in the belief that it reflects all known information. (Betfair, with its lower transactions and information costs, provides its traders with a more realistic assessment as to the chance of longshots and the true probabilities of runners in a horse race- the favourite longshot bias is typically diminished, if not eroded).

Second, there is a strong case to be made that the incorporation of Timeform experts into Betfair&#8217-s horse racing radio service, has merely served to undermine the exclusiveness of the Timeform brand. Indeed, in situations where the Timeform expert&#8217-s selection fails to win, the brand is exposed to ridicule.

It is debatable whether the rather highbrow and serious research provided by Timeform, has any strategic fit with the Betfair trading culture. And one is therefore left to conclude that Betfair has not only misjudged the market for Timeform products, but also, demonstrated a serious lack of awareness of its own customers.

The hard truth of a failed plan is that the core values of the Timeform brand have been diluted through its association with a commercial betting exchange.

Hummm&#8230- I won&#8217-t make any comment on TimeForm (which I&#8217-m not familiar with). However, I will say this, generally speaking.

  1. A betting exchange has no business being a content provider.
  2. Except if the betting exchange can and will develop some very special content that the traditional media can&#8217-t or won&#8217-t provide, and that is of high strategic interest.
  3. The difficulty, though, is that exchange executives and managers don&#8217-t have the first clue about how to set up and run a credible and popular media.
  4. That said, it could well be that some exchange-sponsored or -run media projects will succeed &#8212-due to some highly talented project managers (the exception, not the norm).

&#8212-

NEXT: Predictor Accuracy: the Hedgehog vs. the Fox

Is it the end for US-based betting exchange HedgeStreet?

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The End

Is HedgeStreet closing shop?

Yesterday, I re-published on Midas Oracle the e-mail sent to the HedgeStreet traders and prospects. (Curiously, this e-mail was not sent to me, even though I am in their listing.) They wrote that their overhauling would lead them to propose soon &#8220-new and exciting products&#8221-. Well, I found that interesting.

However, today, one of my Deep Throats ( :-D ) is telling me that it is all bullshit, actually.

  1. They are packaging HedgeStreet for a closing/fire-sale. Everyone is leaving, and only a skeleton crew is left.
  2. The CFTC has minimum capital requirements, which HedgeStreet is not able to sustain. They were burning $1m a month on 5k-10k of revenue, then tightening and tightening&#8230- There&#8217-s just no money left.
  3. UPDATE: Russell Andersson was laid off about 3 months ago. VP of finance leaving, VP of compliance leaving, etc. It is falling apart.

We will see.

Two more wrap-up reviews of the 2007 Consensus Point conference on prediction markets

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&#8212-

Which way does Robin Hanson blow? When he was not involved, he had negative comments on internal prediction markets. Now that he is more involved (keynoting at a vendor conference), he has positive comments. Could it be that The Professor is biased? :-D

Weather Wane

&#8212-

#1. Justin Wolfers on the 2007 Consensus Point conference

Robin Hanson tells me that he is now (back to) bullish on prediction markets – he saw real evidence of real firms implementing prediction markets and taking them seriously.

#2. Jed Christiansen on the 2007 Consensus Point conference

Robin [Hanson] gave a fairly standard introduction to prediction markets lecture that some may have seen at other events or downloaded from his website. It was a good overview of the topic.

The question and answer period was the most interesting part with Robin. He was asked about manipulation, and provided some fairly convincing answers that manipulation shouldn’t be a worry (at least with the correct incentives.) Robin described the situation in terms of sheep and wolves. Sheep aren’t that knowledgeable- they are trading for any number of reasons, and are the “noise” in the marketplace. Wolves take advantage of that, and consequently they look for markets with lots of sheep. With better information, the wolves will easily have plenty to “eat.” The net result is that those noisy markets are accurate markets.

Another concept he talked about was creating a “fudge” account. Let’s say you want to weight one set of traders more than another, or simply want to “move” the forecast in one direction or another- create a “fudge” account to conduct those transactions. If after the account has been running for a while and it’s positive, you’ll know you’ve done a good job fudging. But if the fudge account is negative, you don’t know more than the market so just stop fudging and leave the market to itself. It’s a great idea, and fairly easy to implement.

UPDATE: Jed has more&#8230-

Robin Hanson

Robin gave a quick addendum to his earlier talk, where he focused on the cost-value space of a prediction market. He described an evolution from betting markets, which have negative cost (aka profit) though little value to an organisation, to future prediction markets. Fully evolved prediction markets will certainly have a cost to operate, but the output could have tremendous value to a company.

Profits to be down at Betfair

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Betfair will this week announce its results for the year to 30 April 2007.

The past twelve months have seen a significant increase in the rate of investment by Betfair, as the company has sought to not only consolidate its position as the world&#8217-s leading betting exchange operator, but also, to broaden its product portfolio, so as to create a one-stop-shop solution for online gambling, under the Betfair umbrella.

Betfair&#8217-s Australian based betting exchange went live at the end of August 2006- and in recently filed accounts, Betfair&#8217-s Australian partner PBL (50%) said that the business continues to build critical mass in its first full year of operations, and that its share of after tax losses for the year was $2 million.

In October 2006, Betfair Poker left CryptoLogic Inc. to move to an in-house technology solution- whilst in July 2007 Betfair announced that it had executed a non-binding Letter of Intent with Harrah’s License Company LLC, an affiliate of Harrah’s Entertainment, Inc which designated Betfair.com as the “Presenting Sponsor” of the World Series of Poker (WSOP) Europe through 2011.

In October 2006, Betfair broadened its product portfolio with the launch of an online casino. This followed the previous launch of Baccarat (launched June 2006), Blackjack (launched November 2005), Jacks or Better, Roulette and Omaha Hi (launched April 2007)- all with zero house edge.

At the end of November 2006 Betfair announced that it had acquired Portway Press Limited, the owner of Timeform for somewhere in the region of ?15m.

Looking ahead, Betfair will launch its betting exchange service in Italy and will also enter into the area of financial spread betting.

A decline in revenue growth and profitability is anticipated- with profit before tax likely to be down somewhere in the region of 33%.

There are those that will argue that the company should have stayed focused on its core betting exchange business- and I for one must question whether the company&#8217-s investment in online poker is going to reap the forecast dividends.

[cross-posted from Betting Market]

Encouraging participation in long-term information markets

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No GravatarOne question that often comes up is how to encourage participation in long-term, multi-year event markets. This issue is closely linked to cost of capital, and even play-money markets have opportunity costs and discount rates.

If the outcome is revealed gradually, as with questions about the global climate, offering a series of short-term levered contracts should help. This is not entirely satisfying though because it could be viewed as just increasing the noise in traders&#8217- p&amp-l &#8212- although the traders with correct long-term views will do well, and the greater magnitude of the p&amp-l will attract more traders and keep them interested in the market.

There is just no way to settle a contract today for an event that will happen tomorrow. The most important thing you can do is to minimize the capital required to be committed to the distant event. For instance, traders may be compelled to only post or freeze a fraction of their worst-case loss, although this gets tricky if the contract will likely be resolved in a sudden, drastic jump. In this respect, questions about the climate are more tractable than ones concerning technological breakthroughs, for example. In many cases it may be better to use index futures instead of a binary options.

Most importantly perhaps, remember that most of what &#8220-prediction&#8221- markets do is just aggregating and discounting current information. Therefore ask yourself if anyone feasibly possesses information pertinent to the distant event. There may be nothing to aggregate. It may still be worthwhile to set-up a market because you&#8217-re not sure when someone will learn something relevant, but it is probably undesirable to try to force participation, even for very important questions.

Read the previous blog posts by Jason Ruspini:

  • 2009 tax futures yielding 1.5%
  • Intrade, with carry
  • Talking tax futures on BNN, Canada’s business channel
  • Tax Futures, “In Real Life”
  • How to sell art short
  • YooNew, fears and hopes
  • Policy Event Derivatives

Employees talk about their internal prediction markets around the water fountain.

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Jenny Ambrozek:

A thread among the presenters [of the 2007 Consensus Point conference] was how prediction markets expand people connections in organizations. Through market participation employees from disparate parts of organizations discover unknown people with similar interests and unexpected talents. Market activity becomes a thread in employee conversations. Previously unrecognized expertise emerges through successful trading and listing on leader boards.

It makes people talk more together. Good. Now, are those internal prediction markets accurate and do they have useful predictive power? :-D

UPDATE: Justin Wolfers on the 2007 Consensus Point conference + Jed Christiansen on the 2007 Consensus Point conference

Global Warming prediction exchange is set up.

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Here, courtesy of Inkling Markets. It&#8217-s only $5,000 of play money per trader. But that&#8217-s still a start, so please sign up and let&#8217-s see if we can make the world a better place (i.e. do we invest more in this issue or other issues).

Let me know if you have improvement suggestions. Thanks in advance!

Cross-posted from Caveat Bettor.

Read the previous blog posts by Caveat Bettor:

  • The Democrat SC Showdown: Intrade v. Zogby
  • Zogby beats Intrade in predicting Nevada caucus winner Clinton.
  • The GOP SC and Dem NV Showdown: Intrade v. Zogby
  • Latest Intrade v. Zogby contest is up.
  • Who said prediction markets were perfect?
  • Intrade markets and Zogby polls agree in New Hampshire
  • The Iowa Showdown: Zogby v. Intrade