Zocalo SD Forum 06Aug9

Zocalo: 

Zocalo Open Source Prediction Market Software SD Forum August 9, 2006

Outline: 

Outline Intro to Prediction Markets Benefits Uses in Business Legal Issue Is it gambling? How to get started Zocalo Demo Qandamp;A compare to other mechanisms, history, play money, advanced formats

What are prediction markets?: 

What are prediction markets? Tool for answering questions Alternative to surveys, focus groups, experts Advantage: incorporate info from other sources PMs work well when: Relevant info is accessible, though dispersed Answer will become known Experts are polarized Many people are interested

How do they work?: 

How do they work? Create a pair of financial assets, and commit to redeem them Make it easy to buy, sell, and trade. Price is a good indication of the likelihood Redeemable for $1 if CA Governer not reelected in ‘06 Redeemable for $1 if CA Governer reelected in ‘06

Example: Filibuster Rules: 

Example: Filibuster Rules Claim Description History Chart Current Offers Enter Your Order

Claim Description: 

Claim Description Summary/Short Name Detailed Terms Deadline (absent here) Background Pointers

Trading: 

Trading Price History Chart Current Offers Sell Buy Account Balance Enter Orders

Example: CA Governor’s race: 

Example: CA Governor’s race Multiple Candidates Prices are probabilities If the prediction seems wrong, you can do something about it

Mechanism: Markets vs. Std Bet: 

Mechanism: Markets vs. Std Bet Prediction Markets Trade with other players Odds result from trade House is market neutral Resale Market exists Standard Betting Buy bets from House Odds set to limit house risk House loses some bets No reselling bets

Benefits of Prediction Markets: 

Benefits of Prediction Markets PMs reward expertise, research, insight, good prediction ability PMs penalize closed-mindedness, unwarranted optimism/pessimism Not blocked by organizational boundaries Publicize info as it is produced PMs allow impolitic views to be heard

Accuracy: 

Accuracy Calibrated Predictions (X% chance of Y) How good are Prediction Markets? Elections Sports (Play money andamp; real money) Business

Predictiveness at Google: 

Predictiveness at Google ~150 markets in 45 subject areas Good predictions Notice non-linearity near 100% and near 0%. http://googleblog.blogspot.com/2005/09/putting-crowd-wisdom-to-work.html

Election Markets and Polls: 

Election Markets and Polls IEM swayed less than polls by conventions IEM gives continuous feedback; Polls sporadic Most polls predicted Kerry until September Polls over-predicted Clinton’s margin Berg et. al. 2000 Berg et. al. 2005

Why do they work?: 

Why do they work? Everyone has an incentive to improve the prediction If the current price/probability seems wrong, improve the market’s prediction and earn money by correcting it. The possibility of profit gives people an incentive to learn more and invest based on their research People who are bad predictors learn; get better or get out 'noise traders' make market more lucrative for those with info

Other Benefits: 

Other Benefits Insurance, hedging Provide incentive to develop, discover, invent Predictions update quickly in reaction to news Intermediate estimates for quarterly/semi-annual/etc. data

Prediction Markets Uses: 

Prediction Markets Uses Gambling: TradeSports, others Entertainment: ProTrade, Foresight Exchange Business Info: Microsoft, HP, Google, Inkling, CrowdIQ News Futures: Dentsu, Lilly, PennState, Siemens, WEF Consensus Point, Common Knowledge Forecasting Elections: US (IEM), Germany, Canada, Japan Market Information: LCD Screens, Movies(HSX), Tech Sector Predicting Epidemics: Influenza in Iowa, Bird Flu

Uses in Business: 

Uses in Business forecasting sales project completion technology availability demand for new product

Potential Applications: 

Potential Applications Effectiveness of alternative public policies Malnutrition Poverty Scientific controversy Drug effectiveness andamp; safety Life extension (FX) Global warming (FX)

Potential problems: 

Potential problems Low participation Legal issues Price manipulation

Legal issues: 

Legal issues Prediction Markets are in a legal gray area. Insurance, stock, commodities were illegal once Sports gambling: off-shore Legal in Britain, other places World Court

Legality: Work-Arounds: 

Legality: Work-Arounds Elections: IEM has a special exemption Business use: company puts up money Entertainment: play money or prizes Public policy: currently play money only

How to get started?: 

How to get started? Join an existing market FX, HSX, IEM, TradeSports, ProTrade, Hire a consulting company NewsFutures, ConsensusPoint, Common Knowledge Use a web 2.0 market Inkling, CrowdIQ Build it yourself Microsoft, Google, andamp; HP Use Zocalo

Zocalo: 

Zocalo Open Source Prediction Markets Uses Java, Hibernate, Jetty, Apache commons, jFreeChart, Javascript Customizable Markets Quick demo No restrictions on use

How You Can Help: 

How You Can Help Download software (zocalo.sourceforge.net) Send me Suggestions, Bug Reports, etc. Write new code Use Prediction Markets

Q&A: : 

Qandamp;A:

Compare to experts: 

Compare to experts Markets outperform in general Experts outperform when decision is closed Experts more subject to narrow viewpoint Markets give continuous feedback Use of experts allows predictions to be secret

Compare to focus groups: 

Compare to focus groups Subject to groupthink Loudest voices dominate Only qualitative results Occasionally provide wild ideas Can give insight into zeitgeist (with skilled operator)

Play Money versus Real Money: 

Play Money versus Real Money Equal when info is ubiquitous (sports, elections) Comparable results when prestige matters Play money doesn’t provide: hedging insurance financial incentive for new research

Short Selling Explained : 

Short Selling Explained In a stock market, short seller collects money and take on a potential liability. The other party spends money and gains an asset. Prediction Market traders spend money and gain an asset. Bank ensures that $$ collected now == value redeemed later. There's no potential liability (both parties pay up front), so the market doesn't have to monitor your exposure.

When Not to use PMs: 

When Not to use PMs Predicting random events earthquake, hurricanes They give plausible odds, No early warning; early notice possible after Predicting Papal Elections All the insiders believe it’s a sin to reveal info Predict 'most popular' Bettors often follow early leader Need an external standard for bettors andamp; judges