Predicting sporting events with markets

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Predicting sporting events with markets

  1. 1. Sports Markets Predicting sporting events with markets
  2. 2. Markets <ul><li>Markets aggregate expectations of events via prices </li></ul><ul><ul><li>Traders’ expectations about inflation are routinely factored into stock market prices </li></ul></ul><ul><ul><li>Predictions of Middle Eastern events are factored into the prices of oil futures </li></ul></ul><ul><ul><li>Orange juice future prices accurately predict Florida’s winter weather </li></ul></ul>
  3. 3. Prediction Markets <ul><li>Prediction markets are designed to aggregate information and produce predictions about future events: </li></ul><ul><ul><li>a political candidate’s re-election </li></ul></ul><ul><ul><li>a Hollywood movie’s box-office take </li></ul></ul><ul><ul><li>the outcome of a sporting event </li></ul></ul><ul><li>The price at which the contract trades reflects information about the market’s perception of the likelihood of the event happening </li></ul><ul><li>Prediction markets are markets run for the primary purpose of using the information content in market values to make predictions about specific future events </li></ul>
  4. 4. HP’s Prediction Market <ul><li>In 1996 a group of experimental economists at Hewlett-Packard and CalTech launched a market at HP </li></ul><ul><li>They created a market where participants (product and finance managers, and sales staff) could trade contracts based on expected sales of certain products </li></ul><ul><li>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.” </li></ul>
  5. 5. Are they accurate? <ul><li>Markets attract and identify true experts </li></ul><ul><li>Markets can involve hundreds of thousands of “investors” </li></ul><ul><li>Markets stream dynamic opinions in real-time </li></ul><ul><li>Markets engage people into a conversation with one another and force them to come to a consensus (the trading price) </li></ul>
  6. 6. Are they accurate? (con’t) <ul><li>Market predictions are reliably more accurate  </li></ul><ul><li>Markets generate informed consensus, not average opinions </li></ul><ul><li>HP's “official forecast” was typically off 13%, with the prediction market off by only 6% </li></ul><ul><li>Prediction markets are astonishingly more accurate than other common forms of predictions such as polling, surveys and expert opinions.&quot; -- MIT Technology Review </li></ul>
  7. 7. When to use a market <ul><li>Information/expertise is distributed among many, hard to gather, or difficult to verbalize ( implicit knowledge) </li></ul><ul><li>New information comes in continuously, requiring frequent updates of forecasts </li></ul><ul><li>Companies currently using prediction markets: Eli Lilly, Fnac (FR), American Family Insurance, Cox Communications, M.I.T. Technology Review, Overture / Yahoo!, Dentsu, VNU (FR), ICIS / LOR – a division of Reed Elsevier, USA Today, HP, BP </li></ul>
  8. 8. Sports markets <ul><li>A 2003 study compared the predictive accuracy of a real money exchange – Tradesports.com, with a “play money” exchange – NewsFutures.com. </li></ul><ul><li>In the test, Prediction Markets (the play money exchange) finished in the top 0.4% competing against 1,810 individual NFL “experts” in the probability football contest - the real money exchange. </li></ul><ul><li>The Prediction Market was much more accurate earlier in the season and remained more consistent. </li></ul>
  9. 9. Revenue opportunities <ul><li>Selling the predictions to gaming companies </li></ul><ul><li>Selling the raw market data to gaming companies so they can do their own number crunching / analysis </li></ul><ul><li>Allowing investors to bet on more granular details about a game (sacks, yards gained, etc) and selling this granular predictive data to fantasy football leagues, the football teams themselves, and broadcasters and analysts </li></ul><ul><li>Allowing the outcome and granular detail betting to continue throughout the game, so investors spend 4 hours+ glued to the web site watching 60 minutes of ads each hour </li></ul><ul><li>Setting up discussion areas for &quot;market advisors&quot; where “advisors” charge (play money) for advice and there are more ads </li></ul>
  10. 10. Contact <ul><li>Andrew Forbes </li></ul><ul><li>[email_address] </li></ul>

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