Prediction market
Prediction markets are speculative (i.e., betting) markets created for the purpose of making predictions. Assets are created whose final cash value is tied to a particular event (e.g., will the next US president be a Republican) or parameter (e.g., total sales next quarter). The current market prices can then be interpreted as predictions of the probability of the event or the expected value of the parameter. Other names for prediction markets include information markets, decision markets, idea futures, and virtual markets.People who buy low and sell high are rewarded for improving the market prediction, while those who buy high and sell low are punished for degrading the market prediction. Evidence so far suggests that prediction markets are at least as accurate as other institutions predicting the same events with a similar pool of participants.
Public examples include TradeSports, the Iowa Electronic Markets, NewsFutures, Hollywood Stock Exchange and HedgeStreet. One of the oldest and most famous is the University of Iowa’s Iowa Electronic Market. Since 1988, it has predicted the results of American presidential elections more accurately than traditional polls 75 percent of the time. The Hollywood Stock Exchange, a virtual market game established in 1996, in which players buy and sell prediction shares of movies, actors, directors, and film-related options, correctly predicted 35 of 2005′s 40 big-category Oscar nominees and 7 out of 8 top category winners. HedgeStreet, designated in 2004 as a market and regulated by the Commodity Futures Trading Commission, enables internet traders to speculate on economic events.
These markets actually have a long and colorful lineage. Betting on elections was common in the U.S. until at least the 1940s, with formal markets existing on Wall Street in the months leading up to the race. Newspapers reported market conditions to give a sense of the closeness of the contest in this period prior to scientific polling. The markets involved thousands of participants, had millions of dollars in volume in current terms, and had remarkable predictive accuracy. See Paul Rhode and Koleman Strumpf (2004) [1] for additional details.
In July 2003, the U.S. Department of Defense publicized a Policy Analysis Market and on their website speculated that additional topics for markets might include terrorist attacks. A critical backlash quickly denounced the program as a “terrorism futures market” and the Pentagon hastily cancelled the program.
Prediction markets were championed in James Surowiecki’s 2004 book The Wisdom of Crowds.
Prediction markets are rapidly becoming useful decision support tools for corporations. Several major companies in the US and in Europe are current users of internal prediction markets.
Commercial interest
- Hewlett-Packard pioneered applications in sales forecasting and now uses prediction markets in several business units. Mentioned in academic publications from HP Labs. Also mentioned in Newsweek [8] (October 2004)
- Corning, Eli Lilly, Abbott Labs, Siemens, Masterfoods, Arcelor and other global companies are listed [9] as NewsFutures customers.
- Intel mentioned in Harvard Business Review (April 2003) in relation to managing manufacturing capacity.
- Microsoft is piloting prediction markets internally.
- France Telecom’s Project Destiny has been in use since mid-2004, with very successful predictive behaviour.
- Google has confirmed that it uses a predictive market internally in its official blog [10].
Links
Real-money prediction exchanges (a.k.a. “event-driven futures exchanges” in the U.S., “betting exchanges” in the U.K.):
- BetFair – U.K., E.U.
- TradeSports – Ireland, E.U.
- Intrade – Ireland, E.U.
- Iowa Electronic Markets – U.S.A. (no-action letter from CFTC)
- HedgeStreet – U.S.A. (regulated by CFTC)
- UBC Election Stock Market – Canada
- Betdaq – Ireland, E.U.
- SpreadFair – U.K., E.U. (regulated by UK’s Financial Services Authority)
Play-money prediction exchanges:
- Foresight Exchange Canada
- NewsFutures U.S.A. + E.U.
- Inkling U.S.A.
- CrowdIQ U.S.A.
- PublicGyan India
- Yahoo! Tech Buzz Game U.S.A.
- Hollywood Stock Exchange U.S.A.
- Washington Stock Exchange U.S.A.
- World Economic Forum’s Global Risks Prediction Market (powered and web-hosted by NewsFutures) Switzerland
- CENIMAR: Central Intelligence Market U.S.A.
News articles and opinion pieces:
- The Chris. F. Masse 2005 Awards — Prediction Markets & Decision Markets — by Chris. F. Masse – 2006-03-06
- Wisdom of the crowd – Nature – 2005-11-17
- Market Magic – CFO Magazine – 2005-11-01
- Place your bets! – TIME Magazine – 2005-10-16
- Chris. F. Masse 2004 Year-End Awards – (Honorary awards to best and worst in prediction markets) – 2004-12-31
- Listen to the People Who Got the Election Right. – Prediction markets are brutally honest and uncannily accurate. – 2004-11-28
Academic research papers:
- The Informed Press Favored the Policy Analysis Market – by Robin Hanson - PDF file – 2005-05-05
- Interpreting Prediction Market Prices as Probabilities – Justin Wolfers and Eric Zitzewitz – PDF file – 2005-02-01
- Five Open Questions About Prediction Markets – by Justin Wolfers and Eric Zitzewitz – PDF file – 2005-01-21
- Risk Aversion, Beliefs, and Prediction Market Equilibrium – by Steve Gjerstad – PDF file – 2005-01-00
- The Iowa Electronic Market: Lessons Learned and Answers Yearned – by Joyce E. Berg and Thomas A. Rietz – PDF file – 2005-01-00
- Analysis of 2004 Political Futures Markets – by Ken Allen, Kevin Daniels, Darby Kopp and Brian Murdock – Dartmouth U. – MS Word .DOC file – 2004-11-09
- Prediction Markets: Does Money Matter? – by Emile Servan-Schreiber, Justin Wolfers, David Pennock & Brian Galebach – PDF file – Fall 2004.
- Prediction Markets – by Justin Wolfers and Eric Zitzewitz – PDF file – 2004-05-00
- Interpreting the Predictions of Prediction Markets – by Charles F. Manski – PDF file – 2004-02-00
- Historical Prediction Markets: Wagering on Presidential Elections – by Paul W. Rhode and Koleman S. Strumpf – PDF file – 2003-11-10
This guide is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.
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