introduction to prediction markets
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An Introduction to Prediction Markets (a.k.a. Idea Futures, Decision Markets,
Information Markets, and Event Markets)
alex kirtland / UsableMarkets25 Mar 2007
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Simple Definition of Prediction Markets
• A place where information is aggregated via market (or other) mechanisms for the primary purpose of forecasting events, or the probability that an event will occur
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outcome / contract
outcome / contract
outcome / contract
outcome / contract
outcome / contractAll Others
The “who will win the 2008 presidential election” market
the market (the event)
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Contract Hillary:
Hillary Clinton WILL BE our next president
$0.00 $1.00Price
0% 100%Prediction
$0.26
26%
Hillary Clinton has a 26% chance, at this point in time, of being our next president.
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All Others
The “who will win the 2008 presidential election” market
the market
$0.26 $0.20 $0.18 $0.12 $0.24
26% 20% 18% 12% 24%
= 100%
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Basic Elements of a Prediction Market
1. The Market - Markets are generally created around a specific topic or event, and contain the contracts which are traded. Examples: The “Who will win the 2008 Presidential Election” Market
2. The Contract – A specific prediction that the trader can buy or sellExamples: Hillary Clinton
Binary contract pays out all (e.g. $1.00) or nothing (e.g. $0.00) Linear contract pays out based on final value
3. Trading Platform – The way that someone interacts with the market
Double Auction / Book Order System Automated Market Maker
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Basic Elements of a Prediction Market, cont.
4. Traders – the people who come to a market and participate by buying and selling
Marginal traders – knowledgeable traders Noise traders – traders who are not knowledgeable, or have
some motivation for trading other than what they think the true price should be.
5. Liquidity – the number of trades
6. Currency –real money or fake money.
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Simple Definition of Prediction Markets
• A place where information is aggregated via market (or other) mechanisms for the primary purpose of forecasting events, or the probability that an event will occur
• Why?– Wisdom of the Crowds – “Under the right conditions groups can be
remarkably intelligent and possibly smarter than the smartest person.” James Surowiecki
– Markets provide incentives for information discovery and truthful revelation of beliefs
– Efficient Market Hypothesis – all available information incorporated into the price
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How are prediction markets
different than polls?
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Who uses these things?
?
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www.usableMarkets.comand others ....
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Gamers
Gamblers
Sophisticates
Employees
Your “Average Joe”
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Knows how to trade
Doesn’t
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Most of us
Knows how to trade
Doesn’t
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Where are we now?
• No perfect site, but lots of experimentation
• Industry• Corporate
• A growth industry ...?
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Q&A
Questions I haven’t answered yet ...
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Special Thanks To ...
• Emile Servan-Schreiber (newsFutures)• Ed Lenox (TradeSports)• Robert Wilburn (RimDex)• Adam Siegel (InklingMarkets)• Jed Christiansen (Mercury Research & Consulting) • Bo Cowgill (Google)• David Pennock (Yahoo)• Dave Perry (Consensus Point)• Midas Oracle / Chris Masse (Blog)
Thank You!
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