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Cashing in on Online Prediction Markets
garzpacho writes "BusinessWeek takes a look at the use of prediction markets to forecast business success. These markets have been taking the form of games online--the Hollywood Stock Exchange, for example, allows players to bet on the success of movies. Hollywood is currently one of the largest consumers of prediction market data, in part because movies' broad appeal leads to a large number of players, but also because the markets have been surprisingly accurate--92% in picking Oscar winners over the last three years. Because of this success, other industries are taking a look; pharmaceutical and tech storage businesses are currently working to set up their own markets."
Distrowatch does this... shows the popularity of different distros. It sometimes influences me to try knew distros that manage to make it to the top of the list even if I have never heard of them.
StrategyPage runs a prediction market on geopolitical events, with a similarly high success percentage.
If you'll recall, a similar terrorism futures market was planned by DARPA; it fell victim to political pressure, got deep-sixed, and the proponent, John Poindexter, resigned in a cloud. But the truth is that the idea works well. Here's a summary of the controversy: http://www.wired.com/news/politics/0,1283,59818,00 .html.
Not necessarily. Allowing Joe Q. Public to partake in the market would be a bad idea. Allowing the designers, testers, etc. to (anonymously?) participate is a great idea. Check out The Wisdom of Crowds for a great read.
I remember that the DoD tried something like this with terrorism but cancelled it because of public outrage.Cancelled before it was ever used. It probably would have worked, too.
Even without groups of people, individual predictions of phenomena for which there is a common intuition can be surprisingly accurate. See "Optimal predictions in everyday cognition", reviewed in the Economist.
I've tried Intrade. Tradesports is a division of the same company. You might want to run a few practice transactions on Intrade without putting up any money -- just so you can learn some of the pitfalls:
One is the idea (which I shared for a while) that the majority on any contract position is almost always right -- read the news stories, after all, they all suggest the prediction markets are damn near infallible. But the majority position may be all wrong for most of the life of the contract and then readjust in the space of a few trades, leaving you holding some worthless contracts if you had bought with the market. For example, the Republican gubernatorial hopeful in Virginia was the favorite on Intrade for months, then the market reversed itself very rapidly. Likewise Bush's female Supreme Court nominee was strongly favored to win approval until Arlen Specter voiced his misgivings and her contracts fell from the sky. I guess Intrade racked up wins on both predictions -- but in both cases the markets were wrong until it became dead obvious to everyone that Kaine would win Virginia and Harriet Miers would have to drop out.
The market is not liquid -- usually only a few contracts trade every day. Look at the most popular contracts -- such as will Hillary become the Demo nominee -- just a few thousand contracts outstanding. If you want out of a contract immediately, you may have to drop your asking price markedly below the last traded price.
New information is factored into the pricing with breathtaking speed -- you are going to outsmart this market only by accurately predicting the outcome well in advance of expiration. You can't count on being able to keep pace with the change of pricing, unless you hover over a computer screen and clear all your contracts before you go to bed.
This idea, that while nobody knows the answer, but, everybody knows the answer, was one of the plot devices in the book 'The Shockwave Rider' by John Brunner in 1975. One of my top ten favorite scifi books.
This is a well known phenonena, and has been used for a long time now. If you ever read the book "The Shockwave Rider" by John Brunner, and shame on you if you haven't, you will recognize the "Delphi Boards". They were basically a legalized betting system that allowed you to wager on the possiblity of something happening...for example, a cure for cancer. I won't go more into the story, but you can check it out for yourself!
It is technically known as the Delphi Effect, and you can read more about it here:
http://en.wikipedia.org/wiki/Delphi_effect
ttyl
Farrell
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