Jed Christiansen:
[…] When it comes to the first point, forecasting something that the company already forecasts, prediction markets may or may not be an excellent solution. I’ve seen one set of markets that absolutely blew away the accuracy of current forecasts, and I’ve seen other markets that were consistent with current forecasts with little or no accuracy edge. […]
Care to say more about what is the determinant of an EPM success?
The danger of vendor conferences without any editorial line: It backfires against the whole prediction markets industry —-big time.
I warned my readers many times against the vendor conferences organized by the San Francisco man. He is so desperate that he invites anybody who will pronounce the word “-prediction”- and “-markets”- in the same paragraph. Many of the invited speakers haven’-t the slightest knowledge of the field of prediction markets. As for the vendors, they are incapable of producing one single case study featuring a success in the use of enterprise prediction markets. Not a single one. (And I won’-t mention the “-flow of information”- —-the worst research ever published on prediction markets.) Their vendor websites publish lists of clients, which, at first glance, look impressive, but many of those so-called customers are in fact ancient clients who have ended pilot programs years ago. To add insult to injury, this fake conference is sold $400 to gullible attendees. It is not even worth 4 cents.
The Economist reporter who attended the San Francisco conference realized what I [*] realized long ago: The field of enterprise prediction markets is all smokes and mirrors. The more the prediction market vendors will participate in such crappy conferences, the more the media will realize that the prediction market vendors are all hat and no cattle, and the more they will publish news stories bursting the prediction market bubble. And in the end of 2009, we will end up with 10 news articles in major media telling the world that prediction markets were a fad. Live by the hype- die by the hype.
The only way to get out of this debacle is to come back to basics: Do the research right, do discover the real value of enterprise prediction markets (velocity), and, then, only when you have something to show for it, go out in postings and conferences.
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[*] I follow the field of prediction markets since 2003. I saw it in all shapes and stripes. You can fool your mother, but you can’-t fool me.
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APPENDIX:
An uncertain future – A novel way of generating forecasts has yet to take off. – by The Economist – 2009-02-26
– But although they have spread beyond early-adopting companies in the technology industry, they have still not become mainstream management tools. Even fervent advocates admit much remains to be done to convince sceptical managers of their value.
– Koch says the results so far have been pretty accurate compared to actual outcomes, but stresses that markets are complementary to other forecasting techniques, not a substitute for them.
– A big hurdle facing managers using prediction markets is getting enough people to keep trading after the novelty has worn off.
– Another reason prediction markets flop is that employees cannot see how the results are used, so they lose interest.
– Bosses may also be wary of relying on the judgments of non-experts.
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I have spent several hours re-reading the 2004 AEI-Brookings book, “-Information Markets”- (by which they mean “-prediction markets”-). It is a collection of un-enlightening research articles —-except for the IEM article, which is outstanding, both on the factual and theoretical sides.
In the conclusion of their introduction, Robert Hahn and Paul Tetlock wrote that they want their readers to contemplate the idea that prediction markets could make a “-big”- difference and “-revolutionize public- and private-sector decision-making”-. Well, 4 years later, it is clear that those big dreams didn’-t pan out. Not a single mass media outlet has praised the public prediction markets for their work on the 2008 US presidential election (I am taking about a post-mortem analysis about Election Day, not the primaries). Not a single one. (Not even Justin Wolfers.) And the number of corporations using enterprise prediction markets is still minute. The thinkers who wrote this book (“-Information Markets”-) all made the mistake to put the emphasis on accuracy instead of efficiency. That was the foundation flaw. We should reset and reboot the field of prediction markets.
Previously: The truth about prediction markets
I want to quibble with one of Dave Pennock’-s comments on the CFTC request. Pennock wrote “-It’-s not often that an industry in its infancy cries out for more government oversight.”-
It’-s actually quite common. The term in the economics literature that includes this is regulatory capture. When there’-s a regulatory body specific to a particular industry, it’-s very common for industry to be the major source of expertise in the area, and so for the regulators to be reasonably friendly with the businesses. The businesses can work for regulation that limits entry, and cuts down on competition that reduces profits, and they can work together to ensure that public relations problems are addressed in a cohesive way. But cutting down on competition often means fewer choices for consumers by way of tighter controls on what products are offered.
In our case, the thing I worry about is a narrow ruling that only “-socially valuable”- questions can be asked, and an expensive process for deciding what innovative questions can be posed. It seems likely that some interests will work to ensure that sports and entertainment questions be declared off-limits. The companies that have the strongest interest in fighting that faction are mostly persona non grata in the CFTC’-s eyes, since they currently operate outside the law (TradeSports) or outside the country (BetFair).
The narrower the set of approved questions, or the more expensive the process of getting approval, the less chance that markets will be commercially successful. I think the experiments within companies have indicated (though not proven) that a mix of valuable and popular claims is necessary in order to attract continuing participation.
My biggest worry about fighting for CFTC regulation at this point is that they’-ll approve something narrow, and this won’-t produce enough successes to demonstrate that loosening the restrictions over time would be beneficial. The alternative is to continue to find ways to introduce markets under the radar and demonstrate their value to the academic audience, which could lead to a friendlier hearing in a more distant future after prediction markets have demonstrated social value and little risk of harm.
Of course the other likely outcome is that the novel experiments don’-t happen because of the threat of litigation or regulation. But that seems unlikely given the growth in internal markets within companies. I think there’-s more likelihood of long-term success without regulation than with it, and we’-re better off waiting until the chances that the regulations will provide a broad approval are significantly higher.
(Cross-posted from pancrit.org.)
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Robin Hanson on “-silly”- research topics:
[M]ost people think futarchy (government by [prediction] markets) is silly, even though most think it has a decent chance of performing well […].
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Decision markets and decision-aid markets are 2 great concepts pushed by Robin Hanson, the world’-s #1 researcher in the field of prediction markets. But they are just inventions, not innovations. What is important is to find out which population segment or which class of business executives find this stuff productive and helpful.
In that perspective, his presidential prediction markets at InTrade are good ideas, and the liquidity there (helped by an AMM) is decent enough. But they are just betting supports, right now. I haven’-t seen any opinion leaders taking them as a trusted source of information, which is the damn goal. We will see whether that comes true in the future.
If Robin Hanson were really serious in finding a killer app for his concept of decision-aid markets, he would of course come up with conditional prediction markets in the realm of sports, which is the most popular topic in the real-money prediction markets. Alas, I often have the impression that the academics in the field of prediction markets have profound disdain for sports prediction markets.
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Robin Hanson on seeking decision advice:
[…] We rarely seek out advice, and when we do it is usually on much smaller decisions. […] One reason we avoid getting advice is that it lowers our status relative to those who give advice. Of course this is also makes asking for advice a good way to flatter and supplicate. Not sure if this explains the puzzle though. But all this doesn’-t seem to bode well for fielding decision markets on the biggest organizational decisions.
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Allow me to digress from there. I think that the reading from the prediction markets is like an advice —-in that you have to accept the market message as an authority. If you are an expert with direct access to primary sources of information, I don’-t think you’-d rely on the message from the public prediction markets (which are information aggregation laggards). The big mistake from Robin Hanson and the others has been to sell the public prediction markets as tools for the decision makers. That could happen, but marginally, I believe. Experts and decision makers will firstly want to rely on their primary sources of information and on their analysis.
I think that the population segment which is the more likely to appreciate the consumption of market-generated probabilities would be composed of people who want a chopper view of world events. Prediction market journalism should satisfy this dashboard need.
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[Please note that the thoughts expressed above refer to the public prediction markets (as stated in the post title –think BetFair-TradeFair, InTrade-TradeSports, Betdaq, HubDub, NewsFutures, and Hollywood Stock Exchange) —not the enterprise prediction markets, which is a horse of another color.]
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Robin Hanson on decision-aid markets:
I don’-t recall ever turning down a chance to consult on prediction markets for a Fortune-500 company. If you know of an opportunity that I’-m missing, do let me know.
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Doc, are there more Fortune-500 executives and managers attending a conference on extra-terrestrials or a conference on finance? 
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Mike Linksvayer:
Small comforts of prediction markets
Mike Linksvayer —- November 19th, 2007
Yesterday I had dinner with a friend I hadn’t seen for a few years. I asked what he’d been doing, apart from being a nerd, and he said he’d been spending too much time following the U.S. presidential campaigns (actually just the Ron Paul campaign, but that’s not particularly relevant here). I realized that I don’t do this anymore. It could be because I’m maturing, but I’ll give credit to prediction markets.
Most of the yapping in the media is about the horse race and personalities, which I don’t care about, other than the status of the former. Instead I check prices at Intrade most days, which gives me a more accurate and much more concise status update than any amount of time spent reading or watching commentary.
Furthermore, betting that candidates I detest will win and against candidates I mind less, even in small amounts, really helps me not waste time thinking (mostly distressed thoughts) about the election.
So thank you prediction markets for the time and peace of mind!
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Mike’-s post is the most important piece of wisdom ever published about the prediction markets since the creation of the Iowa Electronic Markets in 1988.
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Hence, I propose that the meager but smiling Mike Linksvayer be made the mascot of the prediction markets.
Mike Linksvayer’-s profile at Midas Oracle
Some of our luminaries have had their vapors and have boldly stated that the public [*] prediction markets would soon take over the free world and become the forecasting tool of choice for decision makers. Since our movement has started, in 2003, that has not happened —-and will never happen (let alone in the year 2020). We were duped by those cocky misleaders. In the coming weeks, I’-m going to try to launch a big intra-industry initiative to find the right usage for the public prediction markets. Stay tuned…- and I hope I’-ll get you on board with me.
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[*] as opposed to the enterprise prediction markets, which is not the topic of my bombastic rant above, which is a horse of another color, and which would deserve a completely different analysis.
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WEB EXCLUSIVE: Here’-s what the political world really cares about…-
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Previous blog posts by Chris F. Masse:
