I just attended a one day seminar in Chicago covering the topic of prediction markets. So what are they? PM's are securities based on the possible outcomes of an event or question. The wisdom of crowds, or crowdsourcing is used to try and discover the probability that the event in question will occur. This has been used in sports betting for as long as anyone can remember, but is now being used to predict all sorts of things. The popularity of this phenomena has risen exponentially since the publication of James Surowiecki's book, The Wisdom of Crowds. Another good, although unstructured, source of information is Chris Masse's site.
I've logged a few of the notes here that came out of the meeting:
- Market participants can bet on future outcome of question or event, question is packaged as a stock in a market, betting is buying and selling the stock.
- Learns by weight updating like a neural net: those who are right get rewarded (wealth), and those who are wrong get punished, so on the next round, those with good info have a higher weight (more wealth to put in “stock”)
- Reasonably good predictors when majority have better than even chance of getting it right. Even if this is not the case, those with low chance get weeded out and weighed down in early runs, and those with good chance get wealthy, until good players control the wealth-weighted majority of the vote
- Important to provide enough incentive for participants to try their best to predict outcome
- There has been limited success with some internal trials by companies (Corning, HP). Other examples are the Iowa Electronic Markets, InTrade (run by TradeSports), and the Hollywood Stock Exchange.
- The market requires enough traders to provide liquidity in order to work. How many is enough. Someone's study showed that it didn't have to be a large number, just an active and informed group, perhaps as small as a dozen?
- Don't charge participants to play. If you do it will be subject to gambling laws.
- Rewards + Recognition + Relevance = Participation