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Introduction Efficacy Market Manipulation Market Design Conclusion
Introduction Efficacy Market Manipulation Market Design Conclusion
Prediction Markets Thomas Steinke & David Rezza Baqaee October - - PowerPoint PPT Presentation
Prediction Markets Thomas Steinke & David Rezza Baqaee October - - PowerPoint PPT Presentation
Introduction Efficacy Market Manipulation Market Design Conclusion Prediction Markets Thomas Steinke & David Rezza Baqaee October 17, 2010 Introduction Efficacy Market Manipulation Market Design Conclusion Contents Introduction
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Introduction Efficacy Market Manipulation Market Design Conclusion
What is a Prediction Market?
- Payoffs are tied to the outcomes of precisely-defined
easily-observable events.
- Three main types of contract:
- Winner take all—costs $p, pays off $1 iff correct
(probability of event).
- Index contract—amount paid varies continuously
(expectation of function).
- Spread betting—prices are fixed but cutoff varies
(quantile function).
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Introduction Efficacy Market Manipulation Market Design Conclusion
Questions
Question
Is risk-neutrality a valid assumption if the stakes are so high?
Question
Is expected utility a valid assumption, given ambiguity?
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Introduction Efficacy Market Manipulation Market Design Conclusion
Examples
- Iowa Electronic Market (up to $500), TradeSports (Intrade),
Hollywood Stock Exchange (HSX).
- Small-scale virtual currency to large-scale financial markets
turning over hundereds of millions.
- Economic forecasting, retail sales, business confidence,
inflation futures, elections, sports, current events.
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Introduction Efficacy Market Manipulation Market Design Conclusion
Bayesian vs. Classical
- Prediction markets can give implied uncertainty about
statistics.
- Statistical agencies also give uncertainties.
- These are different—comparing apples to oranges.
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Introduction Efficacy Market Manipulation Market Design Conclusion
Accuracy
- Prediction markets outperform alternatives.
- Prediction markets will subsume alternative prediction
methods (EMH).
- A study was done on 7,000 NFL, 20,000 MLB, and 100
Movies.
- Empirically, only 3% better in RMSE.
Question
Are NFL, MLB, and movies meaningful examples? Is RMSE a good metric?
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Introduction Efficacy Market Manipulation Market Design Conclusion
Challenger Disaster
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Introduction Efficacy Market Manipulation Market Design Conclusion
Challenger Continued
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Introduction Efficacy Market Manipulation Market Design Conclusion
Market Manipulation
- There appear to be few possibilities for arbitrage.
- Prediction markets show behavioral biases.
- Favorite/long shot bias (Allais Paradox?)
- Preferences contaminating beliefs.
- Potential for bubbles.
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Introduction Efficacy Market Manipulation Market Design Conclusion
Market Design
- Real money or virtual money?
- Servan-Schreiber et al find comparable performance.
- “wealth” is only accumulated through a history of accurate
prediction.
- More flexible and allow for more experimentation.
- Rules out arbitrage, possibly poor incetivization.
- Motivating participation can be difficult.
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Introduction Efficacy Market Manipulation Market Design Conclusion
Applications
- Contingent markets that explicitly tie events.
- Rather than working out implied beliefs about Saddam and
the price of oil, the payoffs could be denominated in oil (no regression).
- Could use prediction markets to make decisions for you
(correlation/causation, moral hazard).
- Hedging risks (most prediction markets are too small, moral
hazard).
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Introduction Efficacy Market Manipulation Market Design Conclusion
Conclusions
- Prediction markets seem to weakly dominate all alternatives
(but can be costly).
- They have positive externalities. So we may need to subsidize
them.
- We’re currently regulating and outlawing them. The Science