InTrade CEO John Delaney states that prediction markets can prevent the next financial cataclysms. Surely. Prediction markets can also restore womens virginity, and treat mens baldness.

Posted on October 14, 2008 by admin

John Delaney states rightfully that the prediction markets are a mechanism that aggregates information dispersed among the population. Then, he goes on at full throttle and states that prediction markets can help &#8220-avoiding future [financial] crisis.&#8221-

Jesus, Mary, Joseph, that&#8217-s quite an extraordinary statement.

John Delaney writes that crucial information is buried deep in the accounting books. That&#8217-s true, but that&#8217-s up to the financial analysts to decipher this problematic &#8212-our event derivative traders can then just pick up on what those experts conclude. The financial experts were unable to prevent the current financial cataclysm. Adding more event derivative traders and more prediction markets won&#8217-t solve any problem.

Prediction markets are only a reflection of the current knowledge of the best experts in town. At best, they are the best umpire you can get between, on one hand, the mass media or the politicians and, on the other hand, the best experts. But when nobody knows anything (or when nobody listens to Nouriel Roubini), the prediction markets are of no help.

What the prediction market industry needs right now is not an ill-informed, bragging rant.

What the prediction market industry needs is a way to discriminate between accuracy and utility.

What we need is more of Robin Hanson.

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UPDATE:

Prediction Market Definition -now updated with the name of Chris Hibbert and Eric Cramptons cult leader built into.

Posted on October 4, 2008 by admin

Prediction markets produce dynamic, objective probabilistic predictions on the outcomes of future events by aggregating disparate pieces of information that the traders bring when they agree on prices. These event derivative traders feed on the primary indicators &#8212-i.e., the primary sources of information. (Garbage in, garbage out&#8230- Intelligence in, intelligence out&#8230-) Hence, prediction markets are meta forecasting tools.

Each prediction exchange organizes its own set of real-money and/or play-money markets, using either a CDA or a MSR mechanism.

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.

The value of a set of prediction markets consists in the added accuracy that these prediction markets provide relative to the other forecasting mechanisms, times the value of accuracy in improved decisions, minus the cost of maintaining these prediction markets, relative to the cost of the other forecasting mechanisms. According to Robin Hanson, a highly accurate prediction market has little value if some other forecasting mechanism(s) can provide similar accuracy at a lower cost, or if very few substantial decisions are influenced by accurate forecasts on its topic.

Mystification, demystification, value assessment, and prediction markets

Posted on October 3, 2008 by admin

Justin Wolfers:

Prediction markets can yield valuable insight into the dynamics of political campaigns, a conclusion we&#8217-ve drawn from years of intensive study and research. We&#8217-ve even proselytized about the value of these markets, extolling their ability to yield sharper insights than pundits or polls. […]

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If this statement were true,

Justin Wolfers&#8217- columns at the WSJ would have been linked to by the blogging political experts. They never were.
The blogging political experts would have adopted the prediction market tool (over than just quoting the InTrade prices out of curiosity). They never did.

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Both the mystification of the prediction markets (mudding the primary indicators into commentary- suggesting that the traders&#8217- anticipations are always sound) and their demystification (listing the primary indicators) don&#8217-t do the trick: Economic science should be able to tell us whether the prediction markets on 2008 US elections are of high social utility, and whether other kinds of prediction markets are of higher social utility. I am not satisfied by what I have been reading, as of today. The prediction markets are rather a tool of curiosity, as of today, not much a tool of forecasting. The prediction markets are not used as a tool by the experts &#8212-by &#8220-the experts&#8221-, I mean all the experts but the prediction market experts (who are expert in nothing else than pumping up the prediction markets): the political experts, the financial experts, the management experts, the oil production experts, the credit experts, the health care system experts, the automobile market experts, the wine market experts, the web technology business experts, the web advertising experts, the medical drug experts, the foreign affairs experts, the military experts, the aviation industry experts, the condom industry experts, the restaurant industry experts, etc.

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APPENDIX

Robin Hanson:

[I]nfo value [] is the added accuracy the markets provide relative to other mechanisms, times the value of accuracy in improved decisions, minus the cost of maintaining the markets, relative to the cost of other mechanisms. A highly accurate market has little value if other mechanisms can provide similar accuracy at a lower cost, or if few substantial decisions are influenced by accurate forecasts on its topic.

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PREVIOUSLY: See Robin Hanson&#8217-s take on Google&#8217-s enterprise prediction markets.

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