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Predictive Markets

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by

Josh Friedman

on 2 May 2013

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Transcript of Predictive Markets

How Do They Work?
Binary Events- Yes or No - You predict either the event will happen or it won't
Will happen = BUY shares
Won't happen = SELL shares
Market price of shares = probability of event happening
Ex: $3.63 indicates a 36.3% probability
You must cover potential loss
Exchange operator freezes max amount you can lose
If you do not have enough cash you cannot make prediction but you can short sell
E.g If you bought 100 Mitt Romney Shares before the 2012 Election at $3.63 a share, you would have suffered a loss of 3.63 x 100= $363 dollars assuming you held your position until the elections were over What Is A Predictive Market? Speculative market created to make predictions about a market event.
Aggregate opinions to form a prediction of the likelihood of something occurring
Run continuously over days/weeks/months
People can change opinion at any time
Changing opinions about the event are reflected in changes in prices on the market
Similar to an online futures market - obligation to cover your position once event is over.
Value Proposition - Aggregating Information & Probability Discovery
Revenue Model- Fees or Subscriptions ( Corporations) Applications Effects/ Implications Predictive Markets ARE brand new markets
Turn anything into a market - create informational efficiency and support human processing
Transforms Financial Markets
Hedging investments & Transparency in forecasting
Reduces the need for expert opinions and forecasts
Quantifying public opinion on a high level will affect consumer and society behavior - herd mentality
Corporations- New Organizational Designs and Communication Strategies Challenges, Niches & Future Josh Friedman, Rakesh Gowni, Ben Kadosh,
Michael Lisovetsky, Rohan Rao Prediction Markets General Challenges Only reflect publicly available information- Not always reliable information
Difficult to run and understand
Assassination Market
May motivate people to take action because of their stake
Manipulation of market E.g. Bear Bush Raid
Legal and Regulatory Concerns
Government regulation likens prediction markets to gambling (illegal) Commercializing Challenges
InTrade was shut down by US Agencies after discovering financial irregularities.
Some companies think of corporate prediction markets as too big of a culture change - especially those with higher power distances and more vertical chains of command - fear of loss of authority
Can get too complex- users lose interest - affects market integrity and accuracy Niches Elections
More accurate than polling
Hard to manipulate numbers
Sports
Sports betting
Corporations
Privately run prediction markets are increasing in popularity
Companies like Consensus Point provide customized prediction market technology to companies like Best Buy and GE Future (1-3 years) Nadex is providing hedging for smaller investors through their own prediction markets trading different financial derivatives
Individual's use of prediction markets remains the same or increases slightly, corporate use of prediction markets grow substantially
John Authers- "They are simply too useful, and they have been around too long; someone will find a way to make the concept work." Collective intelligence- Wisdom of Crowds
Used to predict market events like Elections or Federal Reserve Decisions E.g. Intrade and IEM
Used for casual speculations and predictions with virtual money E.g. Hollywood Stock Exchange
Improve communication and decision making
Used by corporations E.g. Google GOOD RESOURCES 1. The Wisdom of Crowds,James Surowiecki , 2004

2. Infotopia,Cass Sunstein ,2006

3. How to Measure Anything: Finding the Value of Intangibles in Business, Douglas Hubbard, 2011

4. The Journal of Prediction Markets,Leighton Vaughan Williams
Full transcript