Skip to comments.The Efficacy Of Prediction Markets
Posted on 11/08/2007 12:21:43 PM PST by E. Pluribus Unum
As Ive pointed out, Im a believer in prediction markets. For me, though, its more of an intuitive expectation that markets (i.e. revealed preference) are likely to be more accurate than stated preference. The question has come up with Doug, who isnt yet a believer in prediction markets, as to whether there is any empirical evidence on how reliable prediction markets are.
So I went looking, and found a nice paper titled Interpreting Prediction Market Prices as Probabilities (PDF). I recommend following the link and reading the whole thing, but if youre not interested, the first paragraph of the conclusion tells you what was discovered (emphasis added):
An old joke about academics suggests that we are often led to ask: We know it works in practice, but does it work in theory? This paper arguably follows that model. As discussed above, a variety of field evidence across several domains suggests that prediction market prices appear to be quite accurate predictors of probabilities. This paper suggests that this evidence is easily reconcilable with a theory in which traders have heterogeneous beliefs that are correct on average.
There are several concrete examples given, but as a football fan and occasional gambler, I know how difficult it is to predict football games. Last year, I tracked college games as if I were betting on the games, and against the spread I had a surprisingly good 62.5% record. Thats enough to beat Vegas, but the odd thing is that it was still only about an 80% record straight up picking winners and losers. So to read the below made me a believer in prediction markets:
For this reason we turn to two rather unique datasets. The first was provided to us by Probability Football, an advertising-supported free contest that requires players to estimate the probability of victory in every NFL game in a season.17 Including the pre-season and playoffs, this yields 259 games in the 2000 and 2001 seasons and 267 in 2002 and 2003. On average we observe the probability assessments of 1320 players in each game, for a total sample size of 1.4 million observations. Contestants are scored using a quadratic scoring rule; they receive 100 - 400(w - q)2, points where w is an indicator variable for whether the team wins and q is the stated probability assessment. Truthfully reporting probabilities yields the greatest expected points, a fact that is explicitly explained to contestants.
The top three players receive cash prizes. While these rank-order incentives potentially provide an incentive to add variance to ones true beliefs, it turns out that given the number of games in a season, this incentive is small. For instance, in 2003, two mock entrants to this contest that simply used prices from TradeSports and the Sports Exchange (a sports-oriented play-money prediction market run by NewsFutures.com) as their probabilities placed seventh and ninth out of almost 2,000 entrants.
Such ideas are fairly simple. As a personal test, if any readers are in offices where you participate in weekly football pools, try a system of picking instead of your own intuition, and see how you do. For example, Ive seen college pickem pools where you assign a confidence rating to your picks for winners. A simple system would be to take the favorite in every game, and assign the confidence ratings to the teams in order of the largest spread to the smallest spread. You may not always have the best weeks, but I would postulate that over the season, youre going to be in very good shape.
But the key here is that when youre looking at various ways of determining probability, no method is 100% accurate. Prediction markets, though, have certain features that make them more likely to be accurate than many other conventional methods of evaluating probability, like polls. For that reason, and especially now that I have found empirical evidence to support my earlier intuition, I am more and more comfortable in my use of Intrades numbers over those of Gallup or Pew Research.
they are definitely the ultimate exit poll
On the morning of election day 2004, in the predictions of the individual senate races, Tradesports had the eventual winner ahead on every single one of the close ones, even Virginia.
Recently I have had discussions about these kinds of markets with you folks. This seems like the right thread to have that discussion.
Fred Thompson’s blunder
Posted by Kevmo to RockinRight
On News/Activism 11/08/2007 3:01:24 PM PST · 281 of 284
So? In August and Sept. he was in the 30s. So was Intrade right then or is it right now? What about a month from now? Intrade is volatile by its very nature.
***Of course its volatile and no one can predict the future. Fred was in the 30s and, when the market had a chance to measure him up, they pronounced him the segway candidate, the vehicle that didnt measure up to the hype.
The way I look at it, the market was correct then and correct now. For those who really think Freds going to take off, they can actually make money by putting it down for Fred.
Fred Thompson’s blunder
Posted by Kevmo to Tailgunner Joe
On News/Activism 11/08/2007 12:12:07 AM PST · 4 of 284
Fred has lost ~30 points at Intrade over the last few weeks, with some heavy short interest still prevailing.
Thompson Tanking in Futures Markets (Intrade, IEM)
Intrade; Iowa Electronic Markets ^ | October 31, 2008
Intrade forum discussion
That should be enough sampling of Intrade stuff for now.
Fred Thompson Is Finished
Posted by Kevmo to ellery
On News/Activism 11/07/2007 11:19:04 PM PST · 261 of 325
And here was my reply to that same post on this other thread.
The forum over at Intrade has some interesting discussions on how and why Fred has been tanking.
Thanks for the articles. I note that even in 2004, Intrade had $2M being bet back & forth on GWB. There was an attempt to manipulate it per Wikipedia, but it failed. These markets are not perfectly efficient (no market is) but they are better predictors than anything else, including pundits and especially MSM Polls more than a year out. These markets are here to stay, and their presence is growing, especially in corporate america as internal vehicles to help get a handle on aggregated conventional wisdom.
From the article you pointed to:
Those Spurious Presidential Futures:
Intrade.com claims to be the largest futures exchange in the world, and its biggest contract the George W. Bush futures has about $2 million invested currently.
A little before 1 a.m. with the Intrade odds at 37 percent CNN broadcast a live interview with John Aravosis, a liberal activist. We pretty much know where we are, Mr. Aravosis said. The Dems have the House. Republicans have the Senate. And, you know, I dont think thats going to change by morning.
It did change, of course. Mr. Allen soon conceded, and the Democrats began planning their majority. Mr. Wolfers, an economist at the Wharton School of the University of Pennsylvania, sitting in the comfort of his living room, had been a better pundit than most of the professionals on television, thanks to a Web site that is based in Ireland.
Over the last few years, Intrade with headquarters in Dublin, where the gambling laws are loose has become the biggest success story among a new crop of prediction markets.
Were the InTrade prediction markets on the November 2006s Senate elections accurate?
Chris. F. Masse August 2nd, 2007
Revisiting the issue, almost one year later.
Lance Fortnow (University of Chicago) wrote:
So how did those predictions go? In short you can say the markets predicted every individual race correctly but got the senate wrong, but let us look a little more carefully.
At about 9 AM CST on the morning of election day I made a snap shot of the map for a Discovery Channel Website article.
Every state colored blue was won by a democrat and every state colored red went to a republican. But also note the 69% given to GOP (Republican) Senate control although this election will give control to the democrats. No outcome would have made all the states and senate control agree with the 9 AM map.
Were the markets inconsistent? No, because the markets predict not absolutely but probabilistically. For example, the markets gave a probability of winning 60% for each of Virginia and Missouri and the democrats needed both to take the senate. If these races were independent events, the probability that the democrats take both is 36% or a 64% chance of GOP senate control assuming no other surprises.
Of course the races were not independent events and there are other states involved making it more difficult to compare the probabilities of the individual races with that of senate control.
So how did the markets do as predictors? Quite well as the outcome seems quite reasonable given the markets. Other outcomes would have also been reasonable such as the Democrats losing Virginia and the senate remaining in republican hands, a possibility that came very close to happening.
New York Times on prediction markets REDUX
Chris. F. Masse February 14th, 2007
- New York Times.
- Justin Wolfers Interview - by New York Times - (MP3) - 2007-02-14
- Justin Wolfers comment on my 08 is two years away [*] comment:
Your concern about the accuracy of markets two years out seems entirely well placed. But again - and I think it is worth saying this over and over - the relevant question is whether the markets do a better job than alternative information aggregation devices. My own analysis (with Andrew Leigh) of Australian polling data suggests that any polling done more than a year before an election is essentially useless. That is, you are better off simply guessing that the previous election results will repeat themselves, than you are using early polls.
In the Tradesports 2004 presidential markets there was an apparent manipulation effort. An anonymous trader sold short so many Bush 2004 presidential futures contracts that the price was driven to zero, implying a zero percent chance that Bush would win. The only rational purpose of such a trade would be an attempt to manipulate the market in a strategy called a bear raid. If this was a deliberate manipulation effort it failed, however, as the price of the contract rebounded rapidly to its previous level. As more press attention is paid to prediction markets, it is likely that more groups will be motivated to manipulate them. However, in practice, such attempts at manipulation have always proven to be very short lived. In their paper entitled Information Aggregation and Manipulation in an Experimental Market (2005), Hanson, Oprea and Porter (George Mason U), show how attempts at market manipulation in fact end up increasing the accuracy of the market because they provide that much more profit incentive to bet against the manipulator.
So, the tradesports one you reference, that is out of country and plays with real money, right?
I think so, but I have been focusing on Intrade.
We also went through a few discussions of the Intrade market so I’m including that thread as a discussion jumpoff point.
Duncan Hunter is at 5%. Vanity.
Intrade ^ | 10/28/07 | Kevmo
Posted on 10/28/2007 4:48:28 PM PDT by Kevmo
Hunter supporters are constantly being told that our candidate is at 1%. The only real basis for this is biased Media polls. An unbiased source would be Intrade, which has Hunter at a $5 (corresponding to 5%) ask price on the faux exchange, no activity on the real exchange. Futures markets have proven to be better indicators than polls.
I was under the impression Intrade and TradeSports were the same from the wording here:
“Notable exceptions are Intrade/TradeSports, which...”
Say a candidate wanted to move foreign monies into a nonprofit they set up and use it for their campaign. Could this Intrade vehicle be used? Can Intrade be pumped and dumped to receive monies?
Could this Intrade vehicle be used? Can Intrade be pumped and dumped to receive monies?
***It probably could. Intrade is based in Ireland and the regulations are pretty loose. Such an operation would probably show up on some pretty simple monitoring software, though. The volume spike would show up even on our own screenshots.
By the way, Fred’s been tanking on Intrade, and Hunter is probably a real good bargain at 0.1% since he recently polled at 4%.
Another case in point.
Huckabee slides into second in Iowa
KCRG TV News, Iowa ^ | 11/8/2007
Posted on 11/08/2007 8:58:32 PM PST by dano1
Huckabee has been eating Giulianis and Thompsons lunch on Intrade for a few weeks already.
If you insist on using Intrade as an indicator, at least be honest and use the real money market.
I did, on the thread that you got that information from.
And as I said also on that thread, it means Hunter is a bargain at 0.1 because he’s showing up in polls at 4%, which means that if his contract starts tracking the polling data, an interested person can gain 40X return on investment.
On the other hand, you could, deep down, really know that there's a reason it's been stuck at that price for roughly 4 months now.