An Introduction to Prediction Markets (a.k.a. Idea Futures, Decision Markets, Information Markets, and Event Markets) Presented by: Muhammad Daniyal Shafiq.

An Introduction to Prediction Markets (a.k.a. Idea Futures, Decision Markets,

Information Markets, and Event Markets)

Presented by:Muhammad Daniyal Shafiq

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

outcome / contract

outcome / contract

outcome / contract

outcome / contract

outcome / contractAll Others

The “who will win the 2008 presidential election” market

the market (the event)

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.

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%

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

3. Trading Platform – The way that someone interacts with the market

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.

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

HP’s Prediction Market

• In 1996 a group of experimental economists at Hewlett-Packard and CalTech launched a market at HP

• They created a market where participants (product and finance managers, and sales staff) could trade contracts based on expected sales of certain products

• The researchers concluded that if “these markets are large enough and properly designed, they can be more accurate than other techniques for extracting diffuse information, such as surveys and opinion polls.”

•video

Who uses these things?

?

and others ....

Consumer prediction markets

• Iowa Electronic Markets• Intrade Prediction Markets• simExchange • Hollywood Stock Exchange

– Oscar nominees• LongBets

Source: http://www.hsx.com/security/view/INCPT

Social business intelligence in organizations

• PMs in use at 100-200 US organizations (July 2010)– Ex: HP, BestBuy, Electronic Arts, Boeing, Amazon, Harvard, GM,

Hallmark, P&G, Ford, Microsoft, Chevron, Lockheed Martin, CNN, Adobe, American Express, Bosch

• Applications– Project management, risk

management– Revenue forecasting, demand

planning, capital budgeting– Idea management (rate, filter,

prioritize ideas)• Vendors

– Consensus Point, Crowdcast, Bright Idea, Qmarkets, Inkling

Image: http://torontopm.files.wordpress.com/2009/06/quarterly-sales-graph.jpg?w=300&h=234

Where are we now?

• No perfect site, but lots of experimentation

• Industry• Corporate

• A growth industry ...?

Q&A

Questions I haven’t answered yet ...

Thank You!