From Wikipedia, the free encyclopedia Prediction market
Prediction market
markets,
Prediction markets (also known as predictive markets The research literature is collected together in the
markets, markets,
information markets decision markets idea futures futures, peer reviewed The Journal of Prediction Markets, edited by
derivatives, markets)
event derivatives or virtual markets are speculative Leighton Vaughan Williams and published by the Univer-
markets created for the purpose of making predictions. sity of Buckingham Press. The journal was first published
The current market prices can then be interpreted as in 2007, and is available online and in print.[3]
predictions of the probability of the event or the expect- In John Brunner’s 1975 science fiction story The
ed value of the parameter. Shockwave Rider there is a description of a prediction mar-
People who buy low and sell high are rewarded for ket that he called the Delphi Pool.
improving the market prediction, while those who buy In October 2007 companies from the United States,
high and sell low are punished for degrading the market Ireland, Austria, Germany, and Denmark formed the Pre-
prediction. Evidence so far suggests that prediction mar- diction Market Industry Association,[4] tasked with pro-
kets are at least as accurate as other institutions predict- moting awareness, education, and validation for predic-
ing the same events with a similar pool of participants. tion markets.
History Accuracy
One of the oldest and most famous is the University of Some academic research has focused on potential flaws
Iowa’s Iowa Electronic Market. The Hollywood Stock Ex- with the prediction market concept. In particular, Dr.
change, a virtual market game established in 1996 and Charles F. Manski of Northwestern University published
now a division of Cantor Fitzgerald, LP, in which players “Interpreting the Predictions of Prediction Markets”,[5]
buy and sell prediction shares of movies, actors, direc- which attempts to show mathematically that under a
tors, and film-related options, correctly predicted 32 of wide range of assumptions the "predictions" of such mar-
2006’s 39 big-category Oscar nominees and 7 out of 8 top kets do not closely correspond to the actual probability
category winners. HedgeStreet, designated in 1991 as a beliefs of the market participants unless the market
market and regulated by the Commodity Futures Trad- probability is near either 0 or 1. Manski suggests that di-
ing Commission, enables Internet traders to speculate on rectly asking a group of participants to estimate proba-
economic events. bilities may lead to better results.
Prediction markets have a long and colorful lineage. However, Steven Gjerstad (Purdue) in his paper "Risk
Betting on elections was common in the U.S. until at least Aversion, Beliefs, and Prediction Market Equilibrium," [6]
the 1940s, with formal markets existing on Wall Street in has shown that prediction market prices are very close
the months leading up to the race. Newspapers reported to the mean belief of market participants if the agents
market conditions to give a sense of the closeness of the are risk averse and the distribution of beliefs is spread
contest in this period prior to widespread polling. The out (as with a normal distribution, for example). Justin
markets involved thousands of participants, had millions Wolfers (Wharton) and Eric Zitzewitz (Dartmouth) have
of dollars in volume in current terms, and had remark- obtained similar results, and also include some analysis
able predictive accuracy.[1] of prediction market data, in their paper "Interpreting
Around 1990 at Project Xanadu, Robin Hanson used Prediction Market Prices as Probabilities."[7] In practice,
the first known corporate prediction market. Employees the prices of binary prediction markets have proven to be
used it in order to bet on, for example, the cold fusion closely related to actual frequencies of events in the real
controversy. world.[8][9]
In July 2003, the U.S. Department of Defense publi- Douglas Hubbard has also conducted a sample of over
cized a Policy Analysis Market and on their website spec- 400 retired claims which showed that the probability of
ulated that additional topics for markets might include an event is close to its market price but, more important-
terrorist attacks. A critical backlash quickly denounced ly, significantly closer than the average single subjective
the program as a "terrorism futures market" and the estimate.[10] However, he also shows that this benefit is
Pentagon hastily canceled the program. partly offset if individuals first undergo calibrated prob-
Prediction markets are championed in James ability assessment training so that they are good at as-
Surowiecki’s 2004 book The Wisdom of Crowds, Cass Sun- sessing odds subjectively. The key benefit of the market,
stein’s 2006 Infotopia, and How to Measure Anything: Finding Hubbard claims, is that it mostly adjusts for uncalibrated
the Value of Intangibles in Business by Douglas Hubbard.[2]
1
From Wikipedia, the free encyclopedia Prediction market
estimates and, at the same time, incentivizes market par- Using real-money prediction market contracts as a
ticipants to seek further information. form of insurance can also affect the price of the con-
A common belief among economists and the financial tract. For example, if the election of a leader is perceived
community in general is that prediction markets based as negatively impacting the economy, traders may buy
on play money cannot possibly generate credible predic- shares of that leader being elected, as a form of insuran-
tions. However, the data collected so far disagrees.[8] An- ce.[12]
alyzed data from the Hollywood Stock Exchange and the
Foresight Exchange concluded that market prices pre-
dicted actual outcomes and/or outcome frequencies in
Other issues
the real world. Comparing an entire season’s worth of
NFL predictions from NewsFutures’ play-money ex- Legality
change to those of Tradesports, an equivalent real-mon- Because online gambling is outlawed in the United States
ey exchange based in Ireland, both exchanges performed through federal laws and many state laws as well, most
equally well. In this case, using real money did not lead prediction markets that target U.S. users operate with
to better predictions.[9] "play money" rather than "real money": they are free to
Hollywood Stock Exchange creator Max Keiser sug- play (no purchase necessary) and usually offer prizes to
gests that not only are these markets no more predictive the best traders as incentives to participate. Notable ex-
than their established counterparts such as the New York ceptions are Intrade/TradeSports, which escapes U.S. le-
Stock Exchange and the London Stock Exchange, but that gal restrictions by operating from Dublin, Ireland, where
reducing the unpredictability of markets would mean re- gambling is legal and regulated[citation needed], and the
ducing risk and, therefore, reducing the amount of spec- Iowa Electronic Markets, which operates from the
ulative capital needed to keep markets open and liquid. University of Iowa under the cover of a no-action letter
from the Commodity Futures Trading Commission and
Sources of inaccuracy allows bets up to $500.
Prediction markets suffer from the same types of inac-
curacy as other kinds of market, i.e. liquidity or other Controversial incentives
factors not intended to be measured are taken into ac- Some kinds of prediction markets may create contro-
count as risk factors by the market participants, distort- versial incentives. For example, a market predicting the
ing the market probabilities. Prediction markets may also death of a world leader might be quite useful for those
be subject to speculative bubbles. For example, in the whose activities are strongly related to this leader’s poli-
year 2000 IEM presidential futures markets, seeming "in- cies, but it also might turn into an assassination market.
accuracy" comes from buying that occurred on or after
Election Day, 11/7/00, but, by then, the trend was clear.
There can also be direct attempts to manipulate such
Public prediction markets
markets. In the Tradesports 2004 presidential markets There are a number of commercial prediction markets,
there was an apparent manipulation effort. An anony- one of the largest is Betfair which had a valuation in the
mous trader sold short so many Bush 2004 presidential region of £1.5 billion GBP in 2010.[13] Others include, In-
futures contracts that the price was driven to zero, im- trade a for-profit company with a large variety of con-
plying a zero percent chance that Bush would win. The tracts not including sports. The Iowa Electronic Markets
only rational purpose of such a trade would be an at- an academic market examining elections where positions
tempt to manipulate the market in a strategy called a are limited to $500, iPredict and TradeSports a prediction
"bear raid". If this was a deliberate manipulation effort markets for sporting events.
it failed, however, as the price of the contract rebounded In addition there are a number of virtual prediction
rapidly to its previous level. As more press attention is markets where purchases are made with virtual money,
paid to prediction markets, it is likely that more groups these include The simExchange, Hollywood Stock Ex-
will be motivated to manipulate them. However, in prac- change, NewsFutures, the Popular Science Predictions
tice, such attempts at manipulation have always proven Exchange, Hubdub, Knew The News, Tahministan, The
to be very short lived. In their paper entitled "Infor- Industry Standard’s technology industry prediction mar-
mation Aggregation and Manipulation in an Experimen- ket, and the Foresight Exchange Prediction Market.
tal Market" (2005),[11] Hanson, Oprea and Porter (George Bet2Give is a charity prediction market where real mon-
Mason U), show how attempts at market manipulation ey is traded but ultimately all winnings are donated to
can in fact end up increasing the accuracy of the market the charity of the winner’s choice.
because they provide that much more profit incentive to
bet against the manipulator.
2
From Wikipedia, the free encyclopedia Prediction market
Use by corporations of the Billboard music charts. The first of its kind,
Fuse Network and HSX won an AFI Enhanced TV
• The simExchange introduced a perpetual contract (American Film Institute) Award for innoviation in
that it calls "stocks" to predict the global, lifetime television interactivity.[27]
sales of video game consoles and software titles. • Starwood embraced the use of prediction markets
These stocks do not expire like most contracts on for developing and selecting marketing campaigns.
prediction markets because the founder, Brian Shiau, Marketing department started out with some initial
argued that video game sales can continue for ideas and allowed employees to add new ideas or
years.[14] The premise for these stocks is that Shiau make changes to existing ones. Then subsequently
believes the video game industry suffers from a "lack incentives based prediction markets were leveraged
of comprehensive sales data" and he compares the to select the best of the lot.
information problem of a game’s sales to the
information problem of evaluating a company’s
market value. Hanson warns that such a system may
See also
not work if a connection is not enforced.[15] Keith • Election Stock Market
Gamble has described the simExchange as a • Futarchy
Keynesian beauty contest[16] and that financial • Futures exchange
markets have certain remedies such as company • Policy Analysis Market
buy-outs that cannot happen on the simExchange. • Prediction games
Gamble concludes that such a prediction market can
work but will be confined to play money.[17]
• Best Buy, Motorola, Qualcomm, Edmunds.com, and
References
Misys Banking Systems are listed as Consensus Point [1] BettingPaper Historical Prediction Markets:
clients.[18] Wagering on Presidential Elections - by Paul W.
• Hewlett-Packard pioneered applications in sales Rhode and Koleman S. Strumpf - PDF file -
forecasting and now uses prediction markets in 2003-11-10
several business units. Mentioned in academic [2] Douglas W. Hubbard, *How to Measure Anything:
publications from HP Labs. Also mentioned in Finding the Value of Intangibles in Business", John
Newsweek.[19] It is working towards a commercial Wiley & Sons, July 2007
launch of the implementation as a product, BRAIN [3] predictionmarketjournal.com
(Behaviorally Robust Aggregation of Information [4] http://www.pmindustry.org
Networks).[20] [5] “Interpreting the Predictions of Prediction
• Corning, Renault, Eli Lilly, Pfizer, Siemens, Markets” Northwestern University, Dr. Charles F.
Masterfoods, Arcelor Mittal and other global Manski (Revised: 2005)
companies are listed as NewsFutures customers. [6] "Risk Aversion, Beliefs, and Prediction Market
• Intel is mentioned in Harvard Business Review (April Equilibrium" Steven Gjerstad
2004) in relation to managing manufacturing [7] "Interpreting Prediction Market Prices as
capacity. Probabilities" Justin Wolfers (Wharton) and Eric
• Microsoft is piloting prediction markets internally. Zitzewitz (Stanford)
• France Telecom’s Project Destiny has been in use [8] ^ David M. Pennock, Steve Lawrence, C. Lee Giles &
since mid-2004 with demonstrated success.[21] Finn Årup Nielsen (February 2001). "The real power
• Google has confirmed that it uses a predictive of artificial markets" (PDF). Science 291 (5506):
market internally in its official blog.[22][23] 987–988. doi:10.1126/science.291.5506.987.
• The Wall Street Journal reported that General PMID 11232583. http://artificialmarkets.com/am/
Electric uses prediction market software from pennock-2001-science.pdf.
Consensus Point[24] to generate new business [9] ^ "Prediction Markets: Does Money Matter?"
ideas.[25] Servan-Schreiber (Electronic Markets, 2004)
• BusinessWeek lists MGM and Lionsgate Studios as [10] Douglas Hubbard "How to Measure Anything:
two HSX clients.[26] Finding the Value of Intangibles in Business" John
• HSX built and operated a televised virtual stock Wiley & Sons, 2007
market, the Interactive Music Exchange for Fuse [11] manipulation2.dvi
Networks Fuse TV to be used as the basis of their [12] David Schneider-Joseph - Ideas Futures Exchanges
daily live television broadcast, IMX, which ran from [13] "Betfair IPO values company at up to £1.5 billion".
January, 2003 through July, 2004. The television Reuters. 07.10.2010. http://uk.reuters.com/article/
audience traded virtual stocks of artists/videos/ idUKTRE6960NL20101007.
songs, and predicted which would make it to the top
3
From Wikipedia, the free encyclopedia Prediction market
[14] the simExchange The structure of simExchange • "Gruca, Thomas S., Berg, Joyce E. & Cipriano, Michael
game stocks (2005). Consensus and Differences of Opinion in
[15] Robin Hanson on the Sim Exchange Midas Oracle Electronic Prediction Markets." "Electronic
.ORG Markets", 15 (1), 13-22. DOI: 10.1080/
[16] simExchange a Keynesian Beauty Contest Midas 10196780500034939
Oracle .ORG • Hanson, Robin. The Informed Press Favored the
[17] Keith Jacks Gamble: simExchange is somewhat OK, Policy Analysis Market - PDF file - 2005-05-05
but will remained confined in play-money land. • Manski, Charles F. Interpreting the Predictions of
Midas Oracle .ORG Prediction Markets - PDF file - Revised Aug
[18] http://www.consensuspoint.com/customers/ 2005—Manski suggests that there needs to be a
[19] http://msnbc.msn.com/id/3087117/ (October better theoretic basis for interpreting market prices
2004) as probability, and provides a simple model for this.
[20] HP Labs : Solutions and Services Research : New • "Rosenbloom, E. S. & Notz, William (2006). Statistical
Competitive Spaces : BRAIN Tests of Real-Money versus Play-Money Prediction
[21] BIReview Magazine, "An Internal Futures Market" Markets." "Electronic Markets", 16 (1), 63-69. DOI:
(March 2007) 10.1080/10196780500491303
[22] Official Google Blog: Putting crowd wisdom to work • "Servan-Schreiber, Emile, Wolfers, Justin, Pennock,
[23] Microsoft Word - David M. & Galebach, Brian (2004). Prediction
Information_Processing_Inside_the_Firm__draft_Jan_2 Markets: Does Money Matter?" "Electronic Markets",
[24] http://www.consensuspoint.com/ 14 (3), 243-251. DOI: 10.1080/1019678042000245254
[25] http://online.wsj.com/article/ • Spann, Martin & Skiera, Bernd."Internet-Based
SB115073365085184192.html (June 2006) Virtual Stock Markets for Business Forecasting" -
[26] http://www.businessweek.com/technology/ PDF file - Discusses theory, design options and
content/aug2006/tc20060804_618481.htm (August, presents empirical comparisons on forecasting
2006) accuracy of prediction markets
[27] AFI Enhanced TV Workshop • Wolfers, Justin, & Eric Zitzewitz. Prediction Markets -
PDF file - 2004-05-00
Academic Papers • Wolfers, Justin, & Eric Zitzewitz.Interpreting
Prediction Market Prices as Probabilities - PDF file -
• Bell, Tom W. Prediction Markets For Promoting the Draft version 2007-01-08 - Expands on the work of
Progress of Science and the Useful Arts - PDF file - Manski, providing a more general model wherein it
George Mason Law Review (14 Geo. Mason L. Rev 37) is somewhat rational to interpret market prices as
(2006) probabilities
• Berg, Joyce E., & Thomas A. Rietz. The Iowa • Watkins, Jennifer H.Prediction Markets as an
Electronic Market: Lessons Learned and Answers Aggregation Mechanism for Collective Intelligence -
Yearned - PDF file - 2005-01-00 Proceedings of 2007 UCLA Lake Arrowhead Human
• Erikson, Robert S., & Christopher Wlezien. "Are Complex Systems Conference, Lake Arrowhead, CA,
Political Markets Really Superior to Polls as Election 25–29 April 2007.
Predictors?" Public Opinion Quarterly 72(2), Summer • Storkey, A.J. Machine Learning Markets - Journal of
2008, pp. 190–215. Machine Learning Research C&WP 15:AISTATS. 2011.
• Gjerstad, Steven. "Risk Aversion, Beliefs, and
Prediction Market Equilibrium," University of
Arizona Working Paper 04-17, 2005.
External Resources
• The Journal of Prediction Markets
Retrieved from "http://en.wikipedia.org/w/index.php?title=Prediction_market&oldid=470824119"
Categories:
• Prediction markets
• Social information processing
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