In a new kind of prediction network, self-navigating Python, R and Julia algorithms conspire to produce superior electicity predictions than the official forecasts - then automatically review model residuals. They also find their way to any published time series, thereby providing essentially free prediction to anyone who needs it. I will discuss the potential for collective real-time prediction, and demonstrate a prototypical host at Microprediction.Org. Parts of contest theory and a lottery paradox are highly relevant to algorithms submitting distributional predictions.

1. The Lottery Paradox
A New Use
MIT Computer Science & Artificial Intelligence Lab
Dec 1, 2020
Peter Cotton
Chief Data Scientist
Intech Investments

2. Hello. I work for Intech — a leading equity quant manager
2

3. I am asymptotically the world’s most productive data scientist
3
(Returns measured water height … somewhere … from NOAA)
Creates data stream
… or so I tell my boss
At the conclusion of a “ten minute data science project”, a data stream is predicted
by dozens of competing time series algorithms, written by different authors using
different tools, in different languages, with access to different exogenous data.

4. Outline
4
1. On the lottery paradox:
a. Positive returns
b. Continuous lotteries
c. Indifference to the market distribution
d. Relationship between returns and distance
2. Putting it to work:
a. Real-time distributional prediction
b. Stacking lottery games
c. Implied quantiles and copulas
d. Categories of business applications
3. An existence “proof” for a prediction network (that doesn’t exist)
a. The demise of artisan “data science”
b. Why algorithms will manage the production of prediction

5. 5
1. Lottery Paradoxes

6. Lottery paradox #1
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Assume 10% rake. Buyer chooses 1 … 10,000. Most enter randomly.
Mary buys every possible ticket once.
16% return !

7. Lottery paradox resolution - simpler example
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Mary benefits from Alice and Bob tripping on each other’s toes
Only two outcomes

8. Lottery paradox #2
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Let W denote the average number of people sharing the prize.
Alice is a random ticket buyer.
Alice shares with approximately W other people

9. Lottery paradox #2 - resolution
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In the case of two tickets (head and tails), Alice shares with W-½ others
(We can count)

10. Lottery paradox #2 - resolution
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Alice’s average is a population average, not outcome average.
When Alice, Bob and Joe share the prize, it counts three times.
This allows the population average to exceed the average over tickets by almost 1

11. Lottery paradox #2 - better resolution
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Alice wins with ticket 137 → Mean # of people choosing 137 goes up by almost +1.
(“Approximate Bayes”)
c.f. Mary winning conveys no information at all.

12. Lottery paradox #2 - even better resolution?
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Consider Mary’s last ticket …. lucky by +1
But all her tickets are the same

13. Lottery paradox #3: Indifference
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Suppose:
● No rake
● Mary’s investment is small
● Mary optimizes long run wealth
● Mary can see everyone else’s ticket choices

14. Lottery paradox #3: Indifference
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Suppose:
● No rake
● Mary’s investment is small
● Mary optimizes long run wealth
● Mary can see everyone else’s ticket choices
⇒ Mary still buys one of each ticket
⇒ Mary doesn’t care what anyone else does !

15. Racetrack Paradox
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Mary doesn’t look at the odds !

16. Racetrack paradox - resolution #1
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Maximize
Constraint
First order Lagrange condition:
Thus must not depend on the horse index i

17. Racetrack paradox - elementary resolution
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Transfer a tiny investment from first horse to the second
Follows that so they must be equal

18. Remark on Entropy and KL-Divergence
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Entropy … also the term not involving q in Mary’s return
Kullback and Liebler cross-entropy
We can interpret distance of Q from truth P in terms of Mary’s return exploiting it

19. Now for something completely different?
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Mayor draws from “Normalish” distribution
Participants write a real number down. All those close share the prize.

20. Same Game?
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{1,2,...,10000}

21. Mary’s Reward for Accuracy - Exponential
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Market
Mary

22. Mary’s Reward for Accuracy - Normalish
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Market error Mary’s return
10% 20 pts ( 0.2 )
1% 20 bps ( 0.002 )
● Use the fourth root transform to relate exponential
returns to market error … measured as a percentage of
standard deviation

23. 23
2. Realtime distributional prediction

24. Algorithms Play Continuous Lottery Games
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All day, every day
Algorithms authored by anyone Live data published by anyone

25. Algorithms submit 225 scenarios
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Why not point estimates? Ask Roger Federer

26. Quarantine
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Data arrives
12:37:52
Cutoff 12:36:42
70 second quarantine
12:36:57
12:37:27
12:37:46
Qualify for rewards
Time
12:34:27
12:35:41
17.56
Wind
speed
17.57
17.55
Reward
window

27. Implied Percentiles
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Every incoming data point implies a new data point …
z = F(x)
where F is the “community” distribution function
Cumulative distribution for NY Electricity Production (Wind) 1 hr ahead

28. Example: Reactions to the presidential debate
Welcome Module 128
See https://www.microprediction.com/blog/tears_of_joy_standardizing_streaming_data

29. Stacking Lotteries
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Market implied percentiles are themselves the subject of lottery games (via
normal quantile function)
Approximately N(0,1)
Algorithms predicting small
deviations from standard normal

30. Combine Percentiles
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Some seemingly univariate series of games are actually copulas
Pitch and Yaw implied compulas - from MIT SciML helicopula challenge

31. Optics Analogy
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Keep “lensing” until you get N(0,1)
Composition of monotone functions, each contributed by one or more algorithms

32. Pathways in the Collective Probability Brain
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Scenarios “thrown” up to top level lottery
U( )
V( )
R( )
W( )
S( )
T( )
Collaboration
Q( )
Competition
Competition
Competition

33. Law of Iterated Expectations
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Pathways grow and shrink based on the economics
Point estimates are a special case - shift
Exogenous data is a special case - shift arbitrarily (!)
E[Y|X]
E[E[Y|X]|Z]
Y
E[Y|S]
E[E[Y|S]|Z]
E[Y|S,Z,R] = E[E[E[Y|S]|Z]|R]
Scenarios thrown “up” into top level lottery
Management fees charged down from parent to child

34. Wanna Play?
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35. Wanna Predict Something?
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In any language (api.microprediction.org)

36. Use category #1: Auxiliary market predictions
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Markets predict the mean of a stock well
Everything else (pretty much) is poorly predicted, due to lack
of the discipline imposed by competition.
● Volatilities,
● Correlations
● Bid-offer spreads
● Liquidity
● Trading costs
● Holding periods
● Client flow
● Response to inquiry
● Cover price

37. Use category #2: Prioritizing human work
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e.g. reference data cleaning
Probability that a record is changed?
Which records will be changed?

38. Use category #3: Enhancing live data feeds
Welcome Module 138
Tagging.
Converting sporadic live data to continuous.
Discovering existing relationships
Predicting delayed data and partially filled data
Discovering good embeddings
Finding new exogenous data
Discovering good proxies for truth

39. Use category #4: Live feature discovery
Welcome Module 139
Chumming the water
Predicting quantities correlated with the quantity you truly care about
Determining which feature generation algorithms are suited to the task at hand

40. Use category #5: Enhancing business intelligence applications
Welcome Module 140
Predicting numbers on dashboards
Highlighting unusual movements
Predicting human reaction to information, or not (false positives)
Enabling humans to track a larger amount of data in real time

41. Use category #6: Fairness and explanation
Welcome Module 141
Discovering data that reveals hidden bias
Historical example: proxies for race, redlining

42. Usage category #7: Surrogate models
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Competing and combining surrogate models for agent based epidemic modeling
https://www.microprediction.org/stream_dashboard.html?stream=pandemic_infected

43. 43
3. An Existence Proof
(for an automated Machine Learning
network replacing artisan data science
in large part)

44. 1 - Motherhood statement
Welcome Module 144
Quantitative business optimization will be a survival requirement for companies
(Machine Learning is set to transform all industries)

45. 2 - Slightly more controversial...
Welcome Module 145
Quantitative business optimization using ML/AI = frequently repeated prediction
Control theory ~ RL ~ microprediction of value functions

46. 3 - Obvious to MIT folks
Welcome Module 146
Strangers can do your ML for you

47. 4 - Orthodox economics (local knowledge)
Welcome Module 147
At approximately zero friction, markets >> central planning by humans

48. 5 - The rest is busywork ...
Welcome Module 148
Humans will not play a blocking role in the production of prediction
Machine Learning will be orchestrated by hierarchies of real-time generalized contests

49. Thanks for listening !
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50. 50
• Wrote the front end
• Winning crawlers
• Clients in Java, Julia, Rust
• ZK-MUID proofs
• Monotonic NN’s
Thanks to Key Contributors. Join us !
Interested? Join us Friday’s at noon for informal contributor chat
https://www.microprediction.com/contact-us