Tag Archives: prediction markets

Can the prediction markets survive without the over-selling from John Delaney and his little fanboys?

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Emile Servan-Schreiber:

[…] The classic first line of defense in these cases is to remind people that market “predictions” are really just probabilities, so any one outcome cannot invalidate the approach. The argument is sound and backed up by loads of data. But it would of course be much more convincing if we, as an industry, would remember to show at least as much humility when our market “predictions” appear correct instead. If you’re going to spread the idea that your market called all 50 states in the last U.S. presidential election because each correct outcome was predicted with over 50% chance, then you can’t hide behind probabilities when an 80% prediction comes to naught, as in Obama’s NH collapse. […]

Emile Servan-Schreiber makes a good point &#8212-see also Panos Ipeirotis, in the same vein.

But the over-selling is the reason [*] why InTrade (and not NewsFutures) has managed to infiltrate so many US media. If you suppress the magical touch, then InTrade is just a forecasting tool of convenience &#8212-for those too busy to look at the polls.

Give me one reason why the political analysts should follow InTrade instead of the polls, then?

What is the true nature of the prediction markets? How to use the prediction markets? Who should use the prediction markets? For what benefits? Once you have the answer to these 4 questions, you can tackle the next two problematics: How to market the prediction markets without over-selling them. How to report news thru the prism of the prediction markets while respecting their true probabilistic nature.

Welcome to the version #2 of the prediction market industry. Quite a horse of another color, now.

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[*] UPDATE: The over-selling aspect is the topping over the real-money and the liquidity dimensions. The over-selling aspect wraps all that.

NewsFutures Emile Servan-Schreiber has two lines of defense for the prediction markets.

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And a slam at the InTrade fanboys:

[&#8230-] The classic first line of defense in these cases is to remind people that market “predictions” are really just probabilities [*], so any one outcome cannot invalidate the approach. The argument is sound and backed up by loads of data. But it would of course be much more convincing if we, as an industry, would remember to show at least as much humility when our market “predictions” appear correct instead. If you’re going to spread the idea that your market called all 50 states in the last U.S. presidential election because each correct outcome was predicted with over 50% chance, then you can’t hide behind probabilities when an 80% prediction comes to naught, as in Obama’s NH collapse. [&#8230-]

Excellent point, my Lord.

[*] Note that Midas Oracle is stuffed with phrases like &#8220-probabilistic predictions expressed in percentages&#8221-, and full of charts showing these probabilities.

Go reading his second point, now.

[&#8230-] capturing the consensus opinion in a much finer and dynamic way than all the amorphous media buzz [&#8230-]

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TECHNICAL NOTE:

Because NewsFutures is a strictly hierarchical company, I assume the piece is from EJSS, even though our smart man did not sign it. Bad Karma. Anonymous texts have no weight on the Internet.

On the Internet, nobody knows you’re a dog.

Author Profile&nbsp-Editor and Publisher of Midas Oracle .ORG .NET .COM &#8212- Chris Masse&#8217-s mugshot &#8212- Contact Chris Masse &#8212- Chris Masse&#8217-s LinkedIn profile &#8212- Chris Masse&#8217-s FaceBook profile &#8212- Chris Masse&#8217-s Google profile &#8212- Sophia-Antipolis, France, E.U. Read more from this author&#8230-

Read the previous blog posts by Chris. F. Masse:

  • Good news: The BetFair blog now features a prediction market column. — Bad news: Their columnist is an anonymous writer with long hair… and dubious skills.
  • Once again, a BetFair spin doctor misunderstands the prediction market approach.
  • Grandizer
  • Tss… Tss… Surely, you are joking Doctor Giberson.
  • Comments are still open on Midas Oracle.
  • “I am much more aligned with InTrade than you are, Chris.”
  • And the award for the most technology advanced software vendor goes to… the envelope, please…. QMARKETS in Israel. … [Cheers and applauses in the crowd.]

Prediction Markets 101

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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 advanced indicators (like polls and surveys). Garbage in, garbage out&#8230- Intelligence in, intelligence out&#8230-

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 60 times out of 100, the favored outcome will occur- and 40 times out of 100, 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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Any comment, Michael Giberson? :-D

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Credits given to:

– Chris Masse-.

– Justin Wolfers.

– Robin Hanson.

– Jason Ruspini.

– Caveat Bettor.

– John Tierney.

– Jonathan Kennedy.

– Mike Giberson.

– Eric Zitzewitz.

– Cass Sunstein.

– Steve Roman,

– Nigel Eccles.

– The Everyday Economist.

– Adam Siegel.

– George Tziralis.

– Leighton Vaughan-Williams.

– Emile Servan-Schreiber.

– &#8220-Thrutch&#8220-.

– Panos Ipeirotis.

Prediction Markets 101 – Chapter One: Interpreting The Probabilistic Predictions

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&#8220-Thrutch&#8221-:

Probabilities, Prediction Markets, and Popular Fallacies

With Hillary&#8217-s surprise victory over Obama in the New Hampshire primary, pundits everywhere are decrying the allegedly &#8216-wrong&#8217- odds that prediction markets like Intrade were displaying prior to the announced results. (As just one example, Barry Ritholtz weighs in with his &#8216-explanation&#8217- of : &#8220-Why Opinion Markets Fail&#8220-.)

At one point the betting markets were implying over a 90% probability for Obama to win. Does this mean they were &#8216-wrong&#8217-? No it does not. It is impossible to judge whether a given probability is/was correct based on the outcome of a single event.

A 90% probability simply implies that, if you encounter a series of events each with a 90% probability, then 9 times out of 10, the favored outcome will occur- and 1 time out of 10, the unfavored outcome will occur. Those like Ritholtz who are now calling the prediction markets &#8216-wrong&#8217- are implying the following: if the probability is 90% for an outcome to occur, then that outcome should occur every time. In other words, if the odds are 90% in favor of something &#8212- it should happen 100% of the time! But this is obviously fallacious. If the outcome occurs 100% of the time, then the correct probability to assign to it would be 100% &#8212- not 90%.

To validly assess the accuracy of prediction markets, one needs to aggregate all the situations where the odds were 90%, and then calculate whether the favored outcome indeed occurred 90% of the time. (And do the same with each level of probability.) This &#8212- and only this &#8212- will tell you how accurate prediction markets tend to be.

Barry Ritholtz:

As every good prognosticator knows, if you couch your forecasts in probabilities, the innumeric will never know you were wrong. It&#8217-s a cheap trick for the easily fooled.

Imagine if instead of a &#8220-THE END IS NEAR&#8221- sign, every loon carried a sign that proclaimed:

THERE IS A 57% CHANCE THAT THE END IS NEAR!!!

The fact that this didn&#8217-t happen &#8212- and the 43% probability did &#8212- doesn&#8217-t mean this forecast was accurate. It merely meant that the person had proferred two possibilities and one of those two occurred. But the math remains unverified.

Neat trick: By your definition, PREDICTION MARKETS CAN NEVER BE WRONG, so long as they maintain a 1% possibility of the alternative outcome.

That&#8217-s hardly a satisfying defense&#8230-

Author Profile&nbsp-Editor and Publisher of Midas Oracle .ORG .NET .COM &#8212- Chris Masse&#8217-s mugshot &#8212- Contact Chris Masse &#8212- Chris Masse&#8217-s LinkedIn profile &#8212- Chris Masse&#8217-s FaceBook profile &#8212- Chris Masse&#8217-s Google profile &#8212- Sophia-Antipolis, France, E.U. Read more from this author&#8230-

Read the previous blog posts by Chris. F. Masse:

  • Good news: The BetFair blog now features a prediction market column. — Bad news: Their columnist is an anonymous writer with long hair… and dubious skills.
  • Once again, a BetFair spin doctor misunderstands the prediction market approach.
  • Grandizer
  • Tss… Tss… Surely, you are joking Doctor Giberson.
  • Comments are still open on Midas Oracle.
  • “I am much more aligned with InTrade than you are, Chris.”
  • And the award for the most technology advanced software vendor goes to… the envelope, please…. QMARKETS in Israel. … [Cheers and applauses in the crowd.]

Columbia Journalism Review not much convinced by Wall Street Journals Justin Wolfers

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No GravatarTo say the least.

[&#8230-] Unfortunately, by the eve of the New Hampshire primary, Wolfers was back in the Journal, writing this time that the newspaper’s own prediction market, WSJ Political Marketplace, run by Intrade, was showing that New Hampshire might be the “death knell” for Clinton and a couple other candidates. After a bet like that, in Vegas they’d say, &#8220-craps.&#8221- 

Humm&#8230- I don&#8217-t like this CJR piece, but it shows that many in the non-business press are skeptical of prediction markets.

Read the previous blog posts by Chris F. Masse:

  • I get a kick each morning out of spying on the rich, famous, and powerful people updating their LinkedIn profile and connections. (Go to “InBox”, and click on “Network Updates”.)
  • ??? BetFair bet-matching logic ???
  • Eliot Spitzer has simply demonstrated once again that those who rise to the top of organizations are very often the most demented, conflicted individuals in any group.
  • Business Risks & Prediction Markets
  • Brand-new BetFair bet-matching logic proves to be very controversial with some event derivative traders.
  • Jimmy Wales accused of editing Wikipedia for donations.
  • What the prediction market experts said on Predictify

GIGO and prophets, tears and markets

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Prediction markets failed to accurately predict the unexpected effect a few tears had on the New Hampshire primaries- and some analysts rushed to blame the tool and undermine its reliability and applicability. Let me restate some fundamentals and my view, in a snapshot:

  • Markets are not prophets, prophets do not exist.
  • A mechanism&#8217-s forecastability should not be judged against a virtual fool-proof prophet- we&#8217-d better compare it with other existing or widely-used mechanisms and -to my partial and context-bound knowledge- markets outperform all those.
  • Markets are the only tool that intrinsically suggests their probability of failure. If Obama&#8217-s stock is traded at 70 cents, this suggests that there is a 30% probability of Obama losing- I&#8217-d say markets are by character modest and no fanfare has any place in describing their suggestions.
  • Markets are primarily an aggregation/meta mechanism- as such, garbage-in-garbage-out effects are expected to happen, so we&#8217-d need to keep focus on minimizing garbage rather than blaming the market/compiler.
  • Maturity of the mechanism and its use, as long as trading volume (in real-money intrade for example), have not yet reached a fully efficient level (more on this to come soon), but these result in significant profit opportunities, so I expect things to just keep getting better.

cross-posted from my blog

Who did best in explaining the prediction markets to the lynching crowd?

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After the New Hampshire fiasco, 16 18 people came to defend the prediction markets, so far. So far, the best takes are from:

  1. George Tziralis
  2. Robin Hanson
  3. Jonathan Kennedy
  4. and I&#8217-ll give the 4th spot to a combo, mixing takes from John Tierney, Adam Siegel (surprisingly pertinent &#8211-I bet he is on a fish diet, post Christmas :-D ), and Steve Roman.
  5. UPDATE: &#8220-Thrutch&#8220-, Emile Servan-Schreiber and Panos Ipeirotis.

AWOLs (so far): PMIA, AEI-Brookings, InTrade, TradeSports, BetFair, TradeFair, NewsFutures, Emile Servan-Schreiber, Jed Christiansen, Koleman Strumpf, Bo Cowgill, Richard Borghesi, Chris Hibbert, David Perry, Ken Kittlitz, Paul Tetlock, David Pennock, Mike Linksvayer, Brent Stinsky, David Yu, Mark Davis, David Jack, James Surowiecki, Tyler Cowen, Greg Mankiw, Donald Luskin, John Delaney [*], etc.

[*] Steve Bass tells us that John Delaney&#8217-s pre-NH CNBC appearance was awesome. I was up that day, waiting for that CNBC segment, but failed to spot it. If somebody sends me the YouTube link, I&#8217-ll publish it here.

HUBDUB = where the news shape the future

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I like the motto dreamed up by Nigel Eccles and his Scottish team. [I think they&#8217-ll come up with a play-money prediction exchange, but I&#8217-m not sure exactly what they are doing up there.]

And he, too, has come up to the defense of the prediction markets.

[I have updated my list of PM friends. Quite a long list now.]

Author Profile&nbsp-Editor and Publisher of Midas Oracle .ORG .NET .COM &#8212- Chris Masse&#8217-s mugshot &#8212- Contact Chris Masse &#8212- Chris Masse&#8217-s LinkedIn profile &#8212- Chris Masse&#8217-s FaceBook profile &#8212- Chris Masse&#8217-s Google profile &#8212- Sophia-Antipolis, France, E.U. Read more from this author&#8230-

Read the previous blog posts by Chris. F. Masse:

  • Barack Obama is the 44th US president.
  • We already have prediction markets in future tax rates. It’s called the municipal bond yield curve.
  • DELEGATES AND SUPERDELEGATES ACCOUNTANCY
  • O’Reilly – Money-Tech Conference
  • Google Profiles
  • Event Derivative Exchange HedgeStreet is baaaaaaaaack… from the grave.
  • Sports Derivative Forum

The answer to any anti-prediction market backlash is quality, impartial, exchange-independent, science-based, diligent, pro-PM blogging.

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No GravatarIs John Delaney the greatest psychic of all times (past, present, and future)?

Deep Throat is very impressed by how accurate the InTrade-TradeSports CEO&#8217-s 2005 prediction turned out to be. According to Deep Throat, the great Irish oracle &#8220-accurately predicted back in early 2005 in a PM conference in NY that someday the markets will make a horribly wrong prediction and that the [prediction market] industry will take a lot of s**t for it.&#8221-

Hummm&#8230-.

Deep Throat is easily impressed. What about the prediction below, then:

  • One of these days, a powerful hurricane will land in one of the southern states, and make billions of dollars in damage.

Vague and obvious predictions are of little help, here. An interesting thought to have, collectively, is how to prepare well in advance to counter such a backlash &#8212-as it is sure to happen again in the coming years. Due to the readers&#8217- new behavior (using the Web to get their info), the conversational aspect of the Web (comments, bloggers responding to their peers), and the velocity of the bloggers (tempests in tea cups spread over one or two days, and then the bloggers move on), the answer is quality, impartial, exchange-independent, science-based, diligent, pro-PM blogging.

You will note that InTrade-TradeSports, BetFair, NewsFutures, and the other PM firms, are completely absent from the dialogue between anti and pro PMs. The BetFair blog has not published anything about the New Hampshire fiasco, and the InTrade bulletin has only put in writing, on a post, the post-NH market-generated probabilities &#8212-without adding any bit of analysis. Totally pointless and useless corporate publications.

As for me, I have worked hard to put our group blog, Midas Oracle, on the blogging scene. I will further this endeavor and announce new initiatives in the future &#8212-if I am able to do so.

Previous blog posts by Chris F. Masse:

  • NUCLEAR SCANDAL: HubDub allow their traders to bet on celebrities’ death.
  • APRIL FOOL’S DAY: This year, again, CNET makes fun of the wisdom of crowds.
  • Play-money prediction exchange HubDub is a phenomenal success.
  • BetFair Australia’s spin doctor tells all about their payments to the horse race industry.
  • Meet Jeffrey Ma (at right on the photo), the ProTrade co-founder, and whose gambling life is the basis of the upcoming movie, 21.

THE SILICON ALLEY BLOG COMES TO THE RESCUE OF THE PREDICTION MARKETS.

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Silicon Alley&#8217-s Jonathan Kennedy:

[…] In denouncing prediction markets as &#8220-wrong,&#8221- however, many pundits miss the point. Prediction markets do not provide accurate predictions of the future. (How could they? They simply represent the consensus guess of a group of people who aren&#8217-t prophets). They merely provide the most-informed guess as to what that future is likely to be.

As numerous &#8220-collective wisdom&#8221- studies have shown, the consensus guess is always better than the majority of the individual guesses that are factored into it (not sometimes&#8211-always). The collective wisdom, moreover, is often more accurate than that of ANY individual. Why? Because the market collectively incorporates far more information than is available to any one individual.

Like the stock market, prediction markets don&#8217-t get it right every time. They do, however, provide a useful window into the collective expectations of others&#8211-one that is often the best available estimate of the future. And they do sometimes get it right. Just as they did with Mr. McCain.

Bravo, mister Jonathan Kennedy.

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Take that, Barry Ritholtz. :-D

In an upcoming post, we will review the strengths and weaknesses of these thinly traded prediction markets&#8230-

We are holding our breath, Barry. Hurry up.