Entries in prediction market (7)

Saturday
Aug082009

A faux prediction market hits the dust -- Predictify closes

Predictify, a prediction platform that claimed to be "like fantasy sports for everything else" has cited the tough economic climate and announced its decision to close. Capitalizing on the public obsession with news, the site offered a "forward looking dimension" to news reporting -- allowing users to predict events before they happened (!) The site's failure is not surprising.

Predictify asked a wide range of questions. A recent look at the site shows the following questions as among the most popular:

  • Will a cure for Alzheimers be discovered by 2015?
  • Will the national drinking age be lowered to 18 in the next two years?
  • By the end of 2009, what will be Texas' status in the union?

The site also added demographic information to the predictions in an attempt to make the site more fun. I learned, for example, that 25% more Muslims than Mormons expect Hannah Montana to become a billionaire by age 18. I'm not sure what great insight can be gleaned from this observation, even apart from the fact that in a pool of 1,200 total bets, there were surely not enough Muslim and Mormon bettors to make that result statistically significant.

Predictify was one of a whole host of "prediction market" news sites to appear online with the buzz surrounding James Surowieki's The Wisdom of Crowds. They suffered from some common weaknesses:

  • Weak incentives -- relying on a leaderboard when you have thousands of anonymous people who don't know or care about each other is not a particularly effective incentive
  • No market making mechanism -- unlike in a real market, where if you want to buy something, someone has to be willing to sell it to you, these sites allowed all transactions to occur, making them more akin to a poll than a market
  • Stupid questions -- it's partially the fault of the user base who suggested the questions, but there were so many poorly worded serious questions or simply frivolous pop culture questions, that the sites felt more like a cheap, relatively amusing place to waste time than a serious place to think about the probabilities of future events that matter

The greatest fault of all, however, cuts most directly at the legitimate ability of a site like Predictify to generate accurate forecasts: there is zero reason to believe that the site's user base has any insight into the questions at hand. What level of wisdom across pop culture, political, sports, and business events can be expected from the same anonymous crowd?

This is not to say that collective intelligence is not a powerful tool. In Surowieki's book, the famous opening example of a bunch of farmers at a market better able to collectively estimate the weight of a cow than any individual (i.e., the average estimate was nearly exactly right when no single estimate was) is powerful. The difference? These people actually knew something about cows.

By contrast, I have no insight into Jon and Kate's marriage -- there is no reason to think that asking 2,000 people like me whether they will divorce in 2009 would produce a more accurate prediction than say, asking a writer at US Weekly, who follows them around. A crowd in itself does not produce wisdom.

So the novelty of Predictify has worn down and the site is closing. I hope this signals a change in the public consideration of the prediction market industry -- away from silly news forecasting sites with vapid promises of wisdom and towards serious enterprise prediction markets where the market players possess unique information that effectively pooled can produce insights into real company issues.

Saturday
Jun062009

Intrade was right -- "worst case" unemployment projections too rosy

The latest unemployment figures put the U.S. rate at 9.4%. That puts already above the peak of the government's "baseline scenario" used to "stress test" the nation's bank.

Here's a great chart from Calculated Risk comparing the government's scenarios for unemployment rate and the observed rate.

The Intrade market was more pessimistic. As we wrote back in early May, participants gave a 60% chance than unemployment would pass the 10% mark by December 2009. The prediction market saw through the softball predictions of the government.

Wednesday
Apr222009

The unlikely marriage of prediction markets and charitable giving

We have profiled a number of ways in which online mechanisms are facilitating innovations in charitable giving, ranging from social lending to Palestinian entrepreneurs to domestic p2p loans to needy families. Here's a new one: funneling gambling proceeds to selected charities as a means of skirting US anti-gambling laws. At bet2give.com, bettors participate in prediction markets where your online earnings are donated to the charity of your choice. According to founder Emile Servan-Schreiber, since you never see the earnings, this makes the process "not gambling".

Bet2Give is a prediction market site where you can bet on topics ranging from politics to sports to business. Beginning with bets as small as $5 and as large as you want, you can bet real money on future occurences. If you win, then your earnings get donated to your charity of choice; if you lose, your losses get donated to the winner's charity of choice. This promises to offer "the thrill of betting and the power of giving". Thanks to the accounting trick, the site should get more accurate predictions because participants are putting real money on the line. In the end, it all goes to charity regardless, but presumably, participants care enough about their respective charities, to bet as though they were betting for their own gain.

So is this construct being embraced? A few charities have linked back to bet2give, seeing it as a possible fundraising opportunity. I see it as more of a gimmick: charity tagged onto a betting website for the sole purpose of skirting government regulations. None of the markets are socially motivated; I would be interested to see perhaps markets relating to the major charitable players, especially the social lenders and the predicted impact on the welfare of the budding entrepreneurs received loans.

For prediction market enthusiasts, perhaps the bigger problem is the weakness of the markets offered. Today's featured stock is, "A horse leaving from an Even numbered post position will win the 2009 KY Derby" Great! Harnassing the wisdom of crowds to answer a question of pure chance. Not surprisingly, the stock price is hovering right at $0.50.

The marriage seems to be unnatural one: There appears to be only about $5,000 trading on the site currently. Donors moved by an organization enough to want to give it money, don't seem naturally drawn by the prospect of doubling down their bets.  Natural gamblers must get a greater thrill from seeing the money arrive into their bank account than amass on a website where it gets emptied by the end of the month and transferred to various institutions.

Flickr credit: thunderchild tm

Saturday
Apr042009

Will recent online gambling plea impact the prediction market industry?

The former CEO of defunct online gambling firm BetonSports this week pleaded guilty to racketeering conspiracy charges in US federal court, as reported by Reuters.

The line of most interest:

"This plea is a significant step in the government's efforts to end the proliferation of U.S.-facing offshore sportsbooks," said John Gillies, FBI special agent-in-charge in St. Louis.

How will this development impact off-shore based real-money prediction markets? Tradesports obviously has already been shut down and Betfair is illegal in the US, but I wonder if Ireland-based Intrade will be seen as more vulnerable.

Tuesday
Mar312009

A political risk prediction market debuts

A new, commercial forecasting site, the American Civics Exchange, has launched as the first US-based market for political futures. Unlike most current prediction market platforms, they hope to  harness collective knowledge to actually  inform decision making. Their target audience is businesses and investors, who they hope to provide an "effective, reliable hedge" against financial exposure to changes in public policy. From their website:

"The Exchange enables trading of political risk through derivative contracts based on the outcomes of underlying events, including changes in tax policy, enactment of proposed legislation, issuance of regulatory decisions, and outcomes of major litigation.

In the past, businesses have used futures markets to hedge their exposure to fluctuations in commodity prices, interest rates, and even the weather. The American Civics Exchange offers a similar risk management solution for political events.

The inauguration of a new Presidential administration and the unprecedented legislative and regulatory changes being considered in response to the financial crisis have only magnified the bottom-line impact of public policy decisions."

The site seems to have succeeded where other major prediction markets have not: participants will be able to bet REAL money on a platform based in the United States (unlike the murky waters of Intrade and Ireland). The initial public launch is only operating through play money currently, but should be followed shortly by a parallel real money market operating in accordance with the Commodities Exchange Act.

Here are the initial and future selected contracts available for betting:

Initial Real Money Contracts

  • Increase in the capital gains or dividend income tax rate
  • Enactment of Employee Free Choice Act (union “card check”)
  • EPA exemption for California to adopt more stringent emissions standards
  • Enactment of “cap and trade” emissions trading system
  • Reclassification of a service partner’s “carried interest” in a partnership as ordinary income
  • Elimination of the manufacturers’ tax deduction for oil companies
  • Increase in the minimum wage

Selected Future Contract

  • Various new financial services regulations
  • Additional industry bailouts
  • Major healthcare reform
  • FDA drug approvals
  • Windfall profits tax on oil companies
  • Renegotiation/dissolution of existing trade agreements
  • Resolution of major class action lawsuits

Ready to jump in and put your money where your mouth is on these major forecasts?

Don't get too excited just yet. A close read of the terms reveals that the following types of individuals are eligible to trade contracts according to Section 1a(12) of the CEA's rules:

  1. Individuals with more than $10 million in total assets
  2. Individuals with exposure to the relevant underlying risk and more than $5 million in total assets

It looks like about 99% of us are currently shut out.

Flickr Credit: AmandaWalker

Monday
Mar092009

The Intrade "World Crisis" Index

The following contracts were initially priced at 50.0 on January 27, 2009 at the start of the World Economic Forum in Davos. Together, they are equally weighted to form the "world crisis" index on the popular prediction market Intrade.

A higher index means that the markets predict a more disastrous 2009.

How these eight items were chosen remains mysterious. There are far greater crises than a German recession.

Saturday
Feb072009

Daylight Network launches and tries its hand at futarchy

A new social network launched this week aiming to provide a platform “for America to once again become a nation ‘of the people and by the people’.” To facilitate this goal, the Daylight Network offers three features:

  1. Tracking government spending
  2. Participating in prediction markets on government decisions and policies (a service powered by Inkling Markets) with the end goal of influencing policymakers
  3. Connecting with like-minded individuals to discuss government activities and propose alternatives

Features 1 and 3 are traditional government watchdog/social networking offerings, but let’s look at Feature 2. The Daylight Foundation incentivizing thoughtful participation in their prediction markets by providing (fake) trading currency to each trader, and paying out the winning traders with (real) cash prizes.

Many of the trades offered are similar to those found on sites like Hubdub and Intrade, such as estimating the final size of the stimulus package and predicting whether a given cabinet nominee will be confirmed. These prediction results are interesting, but are of limited value to the site’s mission as they have no influence on the actual events themselves.

One market within the site aims higher. Clearly drawing upon the futarchy theory of Robin Hanson (which receives no mention), this market breaks down the Senate stimulus package line-by-line and asks users to rate the provisions from 1 to 5 stars. As we’ve discussed before, in futarchy voters don’t vote on which policies they want (as in a referendum), but rather on which policies they believe are most likely to increase national welfare.

This is where the Senate stimulus package prediction market falls short. The crude formula identified by the Daylight Network is: “create jobs, minimize the impact on the federal debt, and promote fairness to all taxpayers.” Of these three variables, the first is clear and measurable, the second is measurable but less valuable (after all, this is a spending plan and a hit to the federal debt is a given, so the results should really be the focus), while the third is totally incomprehensible (how does one spend to promote fairness TO everyone?) Together, they become an impossible muddle of a standard to evaluate proposed policies against.

With enough users, the site hopes to gain enough momentum to influence the Senate’s deliberations. Unfortunately, by failing to clearly identify the future state that bettors should evaluate each line item against, the market is just collecting a list of voter favorites and least favorites rather than a collective impartial judgment of which items will most likely contribute towards reaching that future desired state. Still, the site is an effective forum to engage voters in talking about these issues and systematically capture their opinions.