…- I’-ll alert you to a developing story. [Slate’s Daniel Gross: Why were the political futures markets so wrong about Obama and Clinton?]
Thanks to a friend.
~alex
Since Chris must sleep at some time (I think)…
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Tag Archives: prediction markets
Prediction Markets as Content, Part 2
Cross posted from UsableMarkets
Back in April I started talking about how Prediction Markets will be part of many news organizations’- “-citizen-generated”- content strategy going forward.
To quote myself (which seems kind of a rude thing to do, doesn’-t it …-?):
It seems as if no self-respecting news organization can ignore the Web 2.0 movement these days. Many now have some sort of “-wisdom of the crowds”- style content, in addition to RSS feeds, blogs, and so on.
Midas Oracle has covered some of the new relationships that are developing. I recently talked about MarketWatch.
Expect more to happen …- and perhaps quickly, too.
That was nine months ago. Since then we’-ve seen the WSJ, the FT, Reuters, CNN, and others (perhaps everyone can think of a couple or three) begin to dabble in or seriously consider prediction markets. With Inkling and InTrade in the white label prediction market business, the barriers to setting one up are obviously low enough that a certain amount of me-too-ism can easily prevail.
But there is a risk, and those of us who care about the success of the prediction market industry shouldn’-t get too excited about these developments just yet.
First, it remains to be see whether these new prediction markets can attract significant numbers of users. The prediction market industry is already saturated with prediction markets and games. So, despite their powerful brands, I’-m not confident that the FT or the WSJ can attract large followings (although I’-d be happy to be wrong about that).
Ah ha, you may say, we don’-t need a lot of users to generate accurate predictions. The MSR, and automated market makers will help solve the problem. But the problem is not one of generating accurate predictions, but about generating page views. Newspapers (even online) are advertising driven. If you can’-t generate sufficient page views, and you’-re paying too much to manage the prediction market on your site, then it’-s vulnerable to being cut. In fact, I wouldn’-t be surprised if once this US election cycle is over that some of these markets fall away.
And, if the news organizations are really interested in the predictions for predictions sake, they can always simply use someone else’-s.
As always, thanks for listening.
~alex (UsableMarkets)
The future of futurism: crowds or entrepreneurs?
Chris Masse has already linked to The Economist story on futurists, which ends with a plug for prediction markets:
The most heeded futurists these days are not individuals, but prediction markets, where the informed guesswork of many is consolidated into hard probability. Will Osama bin Laden be caught in 2008? Only a 15% chance, said Newsfutures in mid-October 2007. Would Iran have nuclear weapons by January 1st 2008? Only a 6.6% chance, said Inkling Markets. Will George Bush pardon Lewis “Scooter” Libby? A better-than-40% chance, said Intrade. There may even be a prediction market somewhere taking bets on immortality. But beware: long- and short-sellers alike will find it hard to collect.
Like Chris, I’-m partial to the plug for prediction markets, but the story from the past year that best fits the five pieces of advice to futurists in the article (think small, think short-term, admit uncertainty, embed in an industry, and listen more) was not about the “-wisdom of crowds.”- Rather, this profile by Michael Lewis of hedge fund entrepreneur/insurance risk modeler John Seo in the NYT Magazine seems to fit the bill.
[NOTE: This post is a somewhat revised version of a posting on Knowledge Problem: What will futurists do in the future? Chris has also already linked to the story on John Seo that was published in August 2007.]
In a truly efficient prediction market, the price will come to reflect the influence of all available information.
Justin Wolfers in the Wall Street Journal:
[…] Through this process of different people trading based on their own observations about the race, prediction markets prices come to aggregate disparate pieces of information into a single summary measure of the likelihood of various outcomes. Moreover, if this market operates efficiently, it will appropriately summarize all of this information and the price will become the most statistically accurate forecast of the election outcome. […]
If I may, I would like to jot down some thoughts related to my concept of prediction market journalism.
- The explainer on prediction markets is pretty good.
- Crappy URL: http://online.wsj.com/article/SB119902559340658043.html?mod=rss_Politics_And_Policy
- No way to leave a comment.
- WSJ did list (in one of the sidebar boxes) BetFair along with InTrade —-good point.
- WSJ didn’-t list NewsFutures and Inkling Markets but listed their own play-money, bots-driven prediction exchange (WSJ Political Market) —-bad point (conflict of interest).
- No external links embedded in Justin Wolfers’- text —-there are very good resources listed in the sidebar boxes, though (but the links use JavaScript and are not direct).
- No static or dynamic prediction market charts, even though Justin Wolfers spent a good deal of air time analyzing the recent prediction market events —-a concept he formalized with Eric Zitzewitz.
- No tips —-”-I can’-t predict what these trends will be […]“-. Sounds like the prediction market approach (declaring that the market is a better forecasting tool than the polls or the experts) kills any anticipation and scenario planning. It shouldn’-t be like that. Prediction market journalism can’-t be only about analyzing the past. More on that in the coming weeks on Midas Oracle —-not in the WSJ.
For all these reasons, I can give more than a straight B to Justin Wolfers’- copy. You can do better than that, prof. 
Bet2Give on CNBC: High impacting media infiltration
CNBC – The Closing Bell – Maria Bartiromo interviewed NewsFutures’- Norris Clark about Bet2Give and about NewsFutures’- enterprise prediction markets. It was great. Great.
The Video – The Video
If Emile Servan-Schreiber or Norris Clark put the video on YouTube, I will embed it in a blog post on Midas Oracle. And if they send me the transcript, I will publish it. It was great. The visuals were great —-like slides. Very good. We’-re making progress, folks.
Some remarks: I didn’-t like that Norris Clark defined Bet2Give as a “-prediction market“-, as opposed to a prediction exchange. And I object about talking about a “-stock market of future events”-. It’-s a derivative exchange for future events, rather.
UPDATE: NewsFutures CEO Emile Servan-Schreiber comments…-
This “-Sinning &- Winning”- tag line below the screen is very strange, since Bet2Give is explicitly about neither. It goes to show how deeply the association between betting and sinning is rooted in the American psyche. By that measure, we’-ve got a looooong way to go still before widespread acceptance of PMs [= prediction markets], not to mention legalization.
Read the previous blog posts by Chris F. Masse:
- Michael Gerber – The E-Myth Revisited
- Changes to TradeFair prediction markets
- Eric Zitzewitz, laughing all the way to the bank
- Michael Bloomberg: I’m not running… but, beware, I am a King maker.
- Meet the 3 Iowa Electronic Markets co-founders: George Neumann, Forrest Nelson and Robert Forsythe.
- When Markets Beat The Polls – Scientific American Magazine
- GLOBAL COOLING
Do sports prediction markets corrupt sport? No.
Mark Davies (”-managing director of corporate affairs at BetFair”- = their spin doctor) in The Guardian:
Does the existence of betting exchanges corrupt sport?
NO
In the world of finance, it has always been far easier for employees to have a negative impact on a company’-s share price than a positive one. Even a chief executive would be hard pushed to cause a price rise on any given day, but anyone with physical access to the company can very easily cause a fall. No one would suggest people should only be able to buy shares, and not sell them. Instead, regulators ensure that sanctions against corruption tip the balance heavily against trying it. Make the penalty draconian, and you deal with corruption at its heart.
Betting on sport is no different. The only people who can corrupt sport are those taking part – a fact unchanged by the existence of betting exchanges. If you prevent people from succumbing to the temptation, would-be corrupters have no one to help them . You and I cannot rig a race just because we can bet against its outcome: we need someone who can affect the result. If that person might lose a livelihood, would they risk it for a fast buck?
Attack corruption at source, and it does not matter where the bet was placed. Nevertheless, some still long for the days when more traditional bookmakers held every card (an interesting notion considering what has historically been their dubious reputation)- others prefer a Tote monopoly- and some believe that banning bets against outcomes would constrain corrupters.
This series of arguments is based on the naive belief that a black market does not exist. This is absurd. Asian syndicates behind apparently rigged football matches (like those who turned floodlights out at grounds in the late 1990s) are no more dependent on Britain’-s legitimate market than Colombian drugs barons are on sales of aspirin at Boots. The difference between legal, regulated, transparent betting – nowhere more so than on the leading betting exchange [= BetFair], where every transaction is open to scrutiny from 29 different sporting regulators – and the murky, illegal market, is the difference between chalk and cheese.
Black markets thrive where legal ones offer poor value. Now that the exchanges offer the best value, those previously tempted by odds on the black market are returning to the legal fold. Corruption-free sport comes from total transparency. The exchanges are the only part of the market that offer it. People get hung up on “-betting to lose”-.
Leave aside the obvious: bets to win (most clearly demonstrated in two outcome sports like tennis or snooker) are direct bets on the opposite outcome to lose. “-Betting to lose”- is just betting at value: if the price unfairly reflects the realistic chance of something happening, why should you not bet against it?
Value bets, placed for or against, are perfectly legitimate- acting to impact a given outcome adversely is corrupt. But banning the former through fear of the latter is like banning cutlery because some people use knives to harm. It is not the knives doing the damage, but the criminals using them. Legal betting does not corrupt sport- people do – and they are more likely to do it when they think they w ill not get caught. Measures to protect sport are not best aimed at open, transparent, and audited betting markets but through its participants, where the corruption can occur.
Excellent.
Prediction markets do react to stale news.
Gilder and Lerman hypothesised that past/present events can potentially assist in predicting future prices in prediction markets. They empirically revealed that prediction markets are surprisingly predictable, even by purely market-historical techniques.
Taking hold of the baton from Gilder and Lerma, Panos Ipeirotis and George Tziralis developed techniques for extracting news flow signals to see whether they can indeed be utilised to predict the future performance of markets on the InTrade prediction exchange. On the question of whether Hillary Clinton will be the Democratic Presidential Nominee in 2008, they noted-
Our sentiment index (in maroon) is close to 1 when we predict that the market will move higher, and it is close to 0 when we predict that the market will move down. Typically, it works pretty well for predicting long periods of price increases and declines. To put our money where our mouth is, the signal for the last few days shows that Hillary’-s market price will edge lower in the next few days/weeks.
Following on from this we looked at the Intrade prediction market and the Betfair markets on whether Hillary Clinton will be the Democratic Presidential Nominee in 2008, as of 10.45 GMT on December 3 2007. Whilst the Intrade market suggested that Clinton’-s probability of victory was 67%, the Betfair market gave a reading of 69%.
We returned to the Intrade prediction market and the Betfair market on whether Hillary Clinton will be the Democratic Presidential Nominee in 2008 at 08.45 GMT on December 7 2007.
Whilst the Intrade prediction market had previously suggested that Clinton’-s probability of victory was 67%, it was now suggesting that her probability of victory was 64%.
The Betfair market which had given a reading of 69% on Decmber 3 as regards her probability of winning the democratic nomination, was now suggesting that her probability of victory was only 50%.
It is quite clear, that the both sets of markets are responding to stale news, with Intrade significantly lagging behind Betfair, as regards its ability to aggregate all available news flow. Those that had sold Clinton on Betfair at 1.44 on December 3, on the back of Panos Ipeirotis and George Tziralis’- advice, are now sitting on a healthy profit. The claim that prediction markets are innefficient would seem to be gathering momentum…-. with the most likely cause being the fact that they are not liquid enough.
http://www.bettingmarket.com/predictionstale.htm
Do you see a sixth dimension to the prediction markets?
Midas Oracle is about the event derivative markets and:
- their profit opportunities (sought by the traders)-
- their predictive power (investigated by the economists)-
- their entertainment ability (delivered by the play-money prediction markets)-
- their hedging utility (employed by the risk managers and monitored by the CFTC)-
- their decision-making capacity (alleged by Robin Hanson).
E-mail me or leave a comment below.
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UPDATE: Xpree’-s Mat Fogarty…-
their training / motivational ability (corporations like their employees to be engaged and knowledgeable about key metrics – PMs reward this process)
Reading the Markets – Forecasting Prediction Markets By News Content Analysis
Reading the Markets – Forecasting Prediction Markets By News Content Analysis – (PDF file) – by Ari Gilder and Kevin Lerman – 2007-xx-xx
Abstract
We present a system for predicting price fluctuations in Prediction Markets, such as TradeSports and the Iowa Electronic Markets. Our approach utilizes both market history and public news articles, published before the beginning of trading each day, to produce a set of recommended investment actions. Since there is evidence that prediction markets are very good indicators of future events, we hypothesize that the converse is true: past/present events can potentially assist in predicting future prices in these markets. We empirically show that these markets are surprisingly predictable, even by purely market-historical techniques. Furthermore, analyzing relevant news articles captures information independent of the market’s history, and combining the two methods significantly improves results. Capturing this signal from news articles requires some linguistic sophistication – the standard naive bag-of-words approach does not yield predictive features. Instead, we use part-of-speech tagging, dependency parsing and semantic role labeling to generate features that improve system accuracy.
We evaluate our system on eight political markets from 2004 and show that we can make effective investment decisions based on our system’s predictions, whose profits greatly exceed those generated by a baseline system. Additionally, our market prediction system can be applied to any Prediction Market with a known end date and for which a set of relevant entities (people, places, or things) can be defined.
Previously: Today’-s prediction markets are far from being efficient.
Author Profile -Editor and Publisher of Midas Oracle .ORG .NET .COM —- Chris Masse’-s mugshot —- Contact Chris Masse —- Chris Masse’-s LinkedIn profile —- Chris Masse’-s FaceBook profile —- Chris Masse’-s Google profile —- Sophia-Antipolis, France, E.U. Read more from this author…-Read the previous blog posts by Chris. F. Masse:
- Car manufacturer Renault (Nissan’s twin) is now a NewsFutures client.
- Nokia’s Enterprise Prediction Markets = Competitive Advantage
- Comments are now completely open on Midas Oracle.
- Albert Einstein, Chairman of the Midas Oracle Advisory Board
- Erratic –but not Stochastic– Charts
- Barack Obama is the 44th US president.
- We already have prediction markets in future tax rates. It’s called the municipal bond yield curve.
Sounds like Sean Park will strike it rich, once again.
Sean Park (Founding Partner at Sixth Paradigm, and blogger at The Park Paradigm)
Sean Park is a leading independent thinker on the future of financial markets, the author of The Park Paradigm, and the founding partner of Sixth Paradigm LLP:
The technology of the digital age is driving an unprecedented explosion in the ability to create markets in anything. Trade anything. Not just physical goods. Not just financial instruments. But ideas. Events. Outcomes. The emergence of these kinds of markets will – over time – impact how we view and interact with the world in all aspects of our personal and professional lives. They will fundamentally alter the current world economic and social paradigm.
Sean is also a founding investor in innovative companies such as Betfair and WeatherBill (where he is also a non-executive Director) and has extensive experience investing in and advising start-up and high growth companies in addition to over 16 years of experience working at a senior level in capital markets and investment banking. Building businesses has been a key theme throughout his career.
I’-m bullish on WeatherBill. They showed that an event derivative exchange can have a more user-friendly interface —-stuff that BetFair-TradeFair and TradeSports-InTrade have not computed yet. I wonder whether the WeatherBill approach could work out with other risks —-other than weather.
On Sean Park, as a blogger, one of my sources said to me that he sometimes elaborates on ideas invented by others years ago and makes it like they are his. I’-m a brand-new feed subscriber to his little blog, so I’-ll judge by myself.
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Previously: Thoughts on Weather Bill – by Eric Zitzewitz – 2007-01-04
What I think is most innovative is the idea of marketing a prediction market contract as “insurance.”