Prediction markets

Live Prediction Markets Simulation Futures & Forecasting - Quantitative Methods Melanie Swan Principal MS Futures Group +1-650-681-9482 @LaBlogga [email_address] www.melanieswan.com July 19, 2011 Slides: http://slideshare.net/LaBlogga Image: http://wall.alphacoders.com/ SU GPS for the Mind: www.mindtimemaps.com/start/sugp SU Prediction Market: gsp11.inklingmarkets.com

Workshop timeline
Quantitative methods introduction 10 min
GPS for the Mind exercise 5 min
Prediction markets lecture 25 min
Estimation exercise 10 min
Live prediction markets workshop 90 min
Prediction Markets July 19, 2011

About Melanie Swan
Hedge fund manager, futurist, entrepreneur, founder DIYgenomics
Work experience: Fidelity, JP Morgan, Arthur Andersen, iPass, RHK/Ovum
Education: MBA Finance, Wharton; BA French/Economics, Georgetown Univ
Current projects: melanieswan.com
Sample publications
Swan, M. Multigenic Condition Risk Assessment in Direct-to-Consumer Genomic Services. Genet. Med. 2010 , May;12(5):279-88.
Swan, M. Translational antiaging research. Rejuvenation Res. 2010 , Feb;13(1):115-7.
Swan, M. Engineering Life into Technology: the Application of Complexity Theory to a Potential Phase Transition of Intelligence. Symmetry 2010 , 2, 150:183.
Swan, M. Emerging patient-driven health care models: an examination of health social networks, consumer personalized medicine and quantified self-tracking. Int. J. Environ. Res. Public Health 2009 , 2, 492-525.
Prediction Markets July 19, 2011 Source: http://melanieswan.com/publications.htm

Forecasting and future studies toolkit
Short term (0-5 yrs): insight and certainty
Forecasting
Scanning
Business intelligence
Trend analysis
Market research
Time orientation
Outlier identification
Technology checklist
Long term (5-20+ yrs): uncertainty , discontinuity
Scenario planning
Simulation
Frameworks
Wild-carding
Longitudinal studies
Multiple time frames
Prediction markets
Image: Bill Frymire

GPS for the Mind exercise Prediction Markets July 19, 2011
Plot time orientation : certainty, possibility, probability www.mindtimemaps.com/start/sugp
Image: http://www.mindtime.com Source: Fortunato, VJ and Furey, JT. The theory of MindTime: The relationships between Future, Past, and Present thinking and psychological well-being and distress. Personality and Individual Differences. January 2011, 50(1), pp. 20-4. http://www.miindtime.com certainty possibility probability

Prediction markets definition Prediction Markets July 19, 2011 Images: http://www.intrade.com Prediction markets are a tool for collecting group opinion using market principles Research has shown that prediction markets can develop more accurate forecasts than polls or experts 1 1 Source: Trepte, K. et al. Forecasting consumer products using prediction markets. MIT. 2009. http://dspace.mit.edu/handle/1721.1/53546

Nexus of markets and collective intelligence Prediction Markets July 19, 2011 Collective intelligence Markets Prediction Markets
Google+
Question networks (Quora, formspring, Hunch)
Wikipedia, wikis, Etherpad
Unconferences
Ignite talks
Tag intros
Twitter
http://www.cs.cornell.edu/home/kleinber/networks-book
Group purchasing (Groupon)
Reverse group purchasing (Loopt u-deals, Ringleadr)
Real-time economy feed (Blippy)
Affinity capital
P2P lending
Gift economy

History of prediction markets Prediction Markets July 19, 2011
Decision markets, idea futures, information markets, event derivatives, virtual markets
Long history of event betting
Election betting, sports betting, stock markets
Modern incarnation – last ~15 years
1988 Iowa Electronic Markets ran first market 1
2002 US DARPA terrorism futures debacle
Proliferation of enterprise and public prediction markets
Testbed for financial contracts
Housing and weather futures, carbon trading, movie futures
Futarchy
Notion of using prediction markets in government policy
Really re-inventing government
1 Source: http://www.midasoracle.org/2007/07/17/history-prediction-markets-timeline Image: http://www.bookshift.com

Prediction markets - definition Prediction Markets July 19, 2011
Price: probability of event occurring
Value: leading indicator, expose hidden information
Pay-off: monetary, reputational, indirect
Accuracy: better than conventional forecasting 1
1 Source: Arrow, K.J. et al “The Promise of Prediction Markets” Science, 2008, 320, 5878, 877-878 http://www.sciencemag.org/cgi/content/summary/320/5878/877 Iowa Electronic Markets: 2008 US Democratic Convention Market
Tool for collecting and aggregating opinion using market principles
Clinton Obama Image: http://upload.wikimedia.org/wikipedia/commons/1/13/IEM_DCON2008.svg

Prediction market view: Obama in 2012 Prediction Markets July 19, 2011 Source: http://www.intrade.com Blip: May 1, 2011, Osama bin Laden killed

U.S. congress to lift debt ceiling? Prediction Markets July 19, 2011 Source: http://www.intrade.com

When to use prediction markets Prediction Markets July 19, 2011
Complexity (ecosystem)
Multi-party value chain
Uncertainty
Clear outcomes
Market liquidity
Diversity of opinion
Prediction markets books

Types of prediction markets
Internal to organizations (enterprise prediction markets)
Revenue forecasting, demand planning, capital budgeting
Idea management (rate, filter, prioritize ideas)
Project management, risk management
External (public prediction markets)
Event prediction (politics: election results; economics: box office receipts, product sales; health: pandemic prediction)
Surfacing relevant content (information valuation)
Prediction Markets July 19, 2011 Source: http://www.intrade.com

Internal prediction markets: Social business intelligence in organizations Prediction Markets July 19, 2011
PMs in use at 100-200 US organizations (July 2011)
Ex: HP, BestBuy, Electronic Arts, Boeing, Amazon, Harvard, GM, Hallmark, P&G, Ford, Microsoft, Chevron, Lockheed Martin, CNN, Adobe, American Express, Bosch
Prediction market vendors
Consensus Point, Crowdcast, Bright Idea, Qmarkets, Inkling
Crowdsourcing and creative concepts market vendors
Chaordix
Jovoto
Image: http://torontopm.files.wordpress.com/2009/06/quarterly-sales-graph.jpg?w=300&h=234

Public prediction markets Prediction Markets July 19, 2011
Iowa Electronic Markets (politics, health; RM)
Intrade Prediction Markets (general; RM)
Hollywood Stock Exchange (movies)
simExchange (gaming)
CROWDPARK (general)
LongBets (futurist; RM)
Source: http://www.hsx.com RM = real money

HSX – Harry Potter 8 (July 15, 2011 release) Prediction Markets July 19, 2011 Source: http://www.hsx.com Jul 15, 2011 Jul 11, 2011 Jul 17, 2011

Gaming prediction market - simExchange Prediction Markets July 19, 2011 Source: http://www.simexchange.com Released: Jun 7, 2011 Release date: expected Apr 2012

IEhM – Iowa Electronic Health Markets Prediction Markets July 19, 2011 Source: http://iehm.uiowa.edu
the “flu markets”

IEhM: anatomy of disease eradication Prediction Markets July 19, 2011 Source: http://iehm.uiowa.edu

Example: RNA folding
A game for RNA folding (like foldit)
Synthesize RNA sequences designed by the top players and chemically probe for structure
RNA sequences designed by algorithms (e.g.; NUPACK): 70% correctness
RNA sequences designed by top players: 95% correctness
Prediction Markets July 19, 2011 Image: http://www.jbsdonline.com Source: http://eterna.cmu.edu/content/EteRNA Image: http://www.nytimes.com

Futurist prediction markets – LongBets Prediction Markets July 19, 2011 Source: http://www.longbets.org/bets

Prediction market design Prediction Markets July 19, 2011
Structure
Event outcome (win/loss)
Market scoring (continuum)
Time frame
Episodic or continuous
Participants
Anonymous users
Participation incentive
Question design:
(the question) What is your opinion?
(the feedback loop) What do you think others will say? How accurately do you think others will answer?
Calibration round (mi qualia no es su qualia)
Image: http://www.intrade.com

Future of prediction markets
Public prediction markets
Opinion capture as a standard website feature
Activity icon cloud: like, +1, tweet, share, comment, bookmark
Two-way XML element
Real-time polling – automatic alerts for opinion entry per interest profile
Enterprise prediction markets
BOL / ERP / supply chain integration
Sales and CRM integration
Reputation: knowledge acuity ratings of individuals become a valuable and personally-tradable currency
Accurate predictor, information steward
Image:http://www.tvrage.com/shows/id-23464

Broader context: markets are the platform Prediction Markets July 19, 2011 Roles of markets Source: Swan, M. New Banks, New Currencies and New Markets in a Multicurrency World: Roadmap for a Post-Scarcity Economy by 2050, presented at Create Futures IberoAmérica, Enthusiasmo Cultural, São Paolo Brazil, October 14, 2009. http://melanieswan.com/documents/economy_20.pdf Types of markets Resource allocation Exchange: supply & demand meet Information (price) discovery Value identification & attribution Utility creation Traditional markets      Prediction markets    Affinity capital    Multicurrency society   Automatic markets   Ideas marketplaces  Scarcity management / abundance injection (PSE)   

Resources
Prediction Markets blogs
http://www.midasoracle.org
http://www.ingenesist.com
http://torontopm.wordpress.com
Prediction Market Industry Association
http://www.pmindustry.org
Important papers
Prelec D. A Bayesian truth serum for subjective data. Science. 2004 Oct 15;306(5695):462-6.
Trepte, K. et al. Forecasting consumer products using prediction markets. MIT. 2009. http://dspace.mit.edu/handle/1721.1/53546
Chang, W. et al. Simulating prediction markets that include human and automated agents. MIT. 2009. http://dspace.mit.edu/handle/1721.1/53097

Questions? Melanie Swan Principal MS Futures Group +1-650-681-9482 [email_address] www.melanieswan.com Slides: http://slideshare.net/LaBlogga Creative Commons 3.0 license SU GPS for the Mind: www.mindtimemaps.com/start/sugp SU Prediction Market: gsp11.inklingmarkets.com Image: http://wall.alphacoders.com/

Prediction markets

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