Mercury’s Blog

If you're new here, you may want to get Mercury's Blog by Email or subscribe to my RSS feed. Thanks for visiting!

One of the hardest parts of building a community around a prediction markets site, whether it’s a public site or an internal corporate site, is educating traders.  In the research I completed last summer, I found that most individuals (when observed with little education outside help files) don’t “trade” so much as they “vote.”

What does this mean?  Well, many traders will pick the contract they believe to be the best among the options presented, and put money down on that option.  What’s important is that this is where they stop.

A few other traders did slightly more complex trades; they may vote one option up while at the same time short-selling another option they they don’t believe will occur.  But whatever they believed, they did not vary from their original opinion by selling their shares or purchasing their short-sells back.  These two very basic styles of trading were exhibited by over half of the traders that I studied.  Little knowledge of trading is required to trade in this way, but there are fewer profit opportunities as well.  Only about 7% of the traders participating in the project were highly active traders, and these were the traders that drove the market’s performance.  (These numbers don’t cover the people that registered but chose not to trade, which also speaks to trader education.)

In order to drive higher levels of adoption, traders need to be properly educated about how to trade.  New users to BetFair receive a series of e-mails that instruct them, step-by-step, in how to login to their account, transfer money into their account, trade, and trade in increasingly more complex methods.  This is exactly what any prediction market site (real-money, play-money, corporate, non-profit, etc.) needs to do.  By teaching their users how to trade, they will become more comfortable trading and trade more.  This will increase liquidity, efficiency and accuracy of any prediction market.

I only have two criticisms of BetFair’s approach.  One is that they were essentially not permission-based.  Instead of reading the next step when they felt they were ready, a new user instead gets approximately an e-mail a day for a couple of weeks.  My second criticism follows from this; there was no real proof or encouragement of education going on.  Compare a set of e-mails to the training materials Kathy Sierra discusses on her blog.  In the horse training packs that Kathy blogs about, users have a huge variety of ways to try out their new learning, prove it to themselves, and receive encouragement to progress further.

In my ideal world, trader education would be a key backbone of any prediction market.  New users would register and would start on a journey to become a master user.  They would receive materials at their own pace; once they had accomplished the planned lesson, there would be feedback and more materials would be sent to the user.  (This could include both electronic lessons as well as physical materials, promotion of user groups, etc.)  Each step would bring them more knowledge of how the market worked and more ability to earn a profit.  This applies to every prediction market, and not just real-money sites!  I use BetFair as an example since they have the best education programme I’ve seen thus far, even though there are significant improvements that they can still make.

Prediction market operators should NOT view educational development as a cost, though it may appear that way financially.  Investing in trader education will pay off significantly through greater word-of-mouth, greater liquidity and more opportunities for traders.

————-

Remember to subscribe to this blog by either clicking here to use an RSS reader or clicking here to subscribe via e-mail.

This entry was posted on Wednesday, May 9th, 2007 at 4:54 pm and is filed under General.