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  • 1. Prediction Markets at Yahoo! David Pennock Yiling Chen, Tej Kasturi, Havi Hoffman, Dan Reeves Chao-Hsien Chu, Sandip Debnath, Mike Dooley, Rael Dornfest, Joan Fiegenbaum, Gary Flake, Lance Fortnow, Brian Galebach, Lee Giles, Joe Kilian, Steve Lawrence, Bernard Mangold, Tracy Mullen, Rahul Sami, Emile Servan-Schreiber, Michael Wellman, Justin Wolfers
  • 2. Prediction markets @ Y! *not to scale microeconomics prediction markets
  • 3. Prediction markets @ Y! Design Build Analyze HSX NF TS WSEX FX PS
  • 4. Case Study I
    • Dynamic parimutuel
      • Market maker
      • Cross btw stock market and horse race betting
    Design Analyze Build
  • 5. Parimutuel market 1 1 1 1 1 1 1 1 1 1 1 1
  • 6. Dynamic parimutuel market .49 .4 .3 0.97 .96 .94 .91 .87 .78 .59 .82 C( 1 , 2 )=2.2 C( 2 , 2 )=2.8 C( 2 , 3 )=3.6 C( 2 , 4 )=4.5 C( 2 , 5 )=5.4 C( 2 , 6 )=6.3 C( 2 , 7 )=7.3 C( 2 , 8 )=8.2 C( 3 , 8 )=8.5 C( 4 , 8 )=8.9 C( 5 , 8 )=9.4
    • Share-ratio cost function:
    • C( q 1 , q 2 )=  q 1 2 + q 2 2
    • Properties
      • No arbitrage
      • price i /price j = q i /q j
      • price i < $1
      • payoff if right = C/q o > $1
  • 7. Share-ratio price function
    • One can view DPM as a market maker
    • Cost Function:
    • Price Function:
    • Properties
      • No arbitrage
      • price i /price j = q i /q j
      • price i < $1
      • payoff if right = C(Q final )/q o > $1
  • 8.
    • Yahoo!,O’Reilly launched Buzz Game 3/05 @ETech
    • Research testbed for investigating search futures
    • Buy “stock” in hundreds of technologies
    • Earn dividends based on actual search “buzz”
    • API interface
    • Exchange mechanism is new Yahoo!R invention Cross btw stock market and horse race betting
    http://buzz.research.yahoo.com
  • 9. http://buzz.research.yahoo.com
  • 10. Technology forecasts
    • iPod phone
    • Google Calendar
    • Another Apple unveiling 10/12; iPod Video
    search buzz price 9/8-9/18: searches for iPod phone soar; early buyers profit 8/29: Apple invites press to “secret” unveiling 8/28: buzz gamers begin bidding up iPod phone 9/7: Apple announces Rokr 9am 10/5
  • 11. Forecast Accuracy
    • Average forecast error across 352 stocks
    end of phase 1 contest period forecast error rapidly declines as traders zero in on correct predictions
  • 12. Early Lessons Learned
    • Forecasts point in right direction
    • Market closing deadline focuses traders
    • Dividend levels matter
    • Intelligent strategies work
      • Randomized bots lost money to real traders
      • Contest winner followed optimal buzz trading strategy (prices   buzz); Went from 4 th to 1 st place in final days
      • Forecast error does decrease over time
  • 13. Analysis
  • 14.
    • Design | Delivery | Operations | Analysis
    • Highly Customized Solutions
    Business-value markets since 2002 , as covered in: Sample Customers « Trading uncertainty for collective wisdom » Prediction Market Competitive Forecasting TM Idea Pageant TM One Platform – Many Solutions
  • 15. What’s next?
    • What the buzz game thinks will grow
      • Web app framewks: Ruby on Rails
      • VOIP: Skype
      • Blinkx Desktop Search
      • Blog Services: WordPress
      • AJAX frameworks: scriptaculous
      • Linux: Ubuntu
  • 16. Case Study II
    • Yootopia : Y!Internal economy for favors, predictions, grp decisions
    Design Build Analyze
  • 17. More
    • Betting mechanisms
      • Combinatorics
      • Infinite/continuous
      • Linear programming backbone
    • Market makers
    • Applications
    Design Build Analyze
    • Computational complexity
    • Does money matter?
    • Wisdom of crowds: Combining experts
    • IOU social network
    • Ledger system
    • Buzz Game: Tech stock horse race