Mercury's Blog

If you haven’t already heard of them, there are two great networking and business tools that I’d like to strongly recommend. Together, they can help you understand who is in your network, and stay connected to the network you have.

(Hat tip to Furqan for pointing out this double shot of networking goodness.)

LinkedIn

LinkedIn is a professional’s networking site. You register and essentially post as much or as little of your CV/resume as you’d like. Then, you connect to people you know and/or have worked with at your various jobs or schools. Very quickly you can see your extended network and make connections that you may have never realised existed.

The reason I like LinkedIn is that it doesn’t focus on the social in social networking; I’m not necessarily trying to stay good friends with everyone I’m “connected” to there. But I have worked with all of my connections and would be willing to recommend them to others for the right role or reason.

If you’re curious about security, don’t worry. Even if you post your entire CV on LinkedIn, you can still select it so that any random public person searching for you sees as much or as little as you desire. (Mine is set so that anyone can see a majority of my profile.)

How can you use this? It’s simple; instead of doing a Google search on people I’d like to know more about or meet, I just put their name into LinkedIn. It’s surprising how many times they’ll be within just a couple of degrees of separation from me. You can then use the tools on the site to get “Introduced” to someone you’d like to meet.

Plaxo

Plaxo is a tool for managing your address-book. If you register with Plaxo, you can make connections with everyone that you already have in your addressbook(s), which are easily imported. More importantly, it automatically syncs any changes in your contact info with those people whom you’re connected to.

What does this mean? If I have my mobile phone stolen and change my number, I can update my own personal addressbook card. It is then automatically sync’d with Plaxo, and Plaxo automatically sync’s it up with every other Plaxo member I’m connected to!

For those contacts that aren’t on Plaxo, you can also send out e-mails to them from time to time and have them check to make sure you’ve got their correct information. Fairly often they’ll then register with Plaxo themselves, and even if they don’t you’ll at least get their most up-to-date information.

Even better, Plaxo has tools that leverage Outlook (and also Mac Mail). When you get an e-mail from someone new, you can automatically add them to your addressbook, and see if they’re on Plaxo. It makes the day-to-day task of building your electronic Rolodex much easier. There are even more features and options I haven’t played with yet.

Finally, the site maintains two separate addressbook entries for you: work and home. You can select which cards each of your contacts get to see, so you can keep the privacy you want.

Summary

I would highly recommend these tools to everyone. Together, Plaxo and LinkedIn can be an unbeatable combination of getting connected to people you know, and leveraging that network to accomplish your goals. Good luck, and I hope to connect!

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I wanted to provide some quick, incremental results on some research that I’ve been conducting this summer.  For those of you not familiar with my paper from the Journal of Prediction Markets, I examined how small a group of traders was necessary in order to have calibrated results.  (Using the Inkling algorithm before they instituted Robin Hanson’s MSR, that point was at about 15 traders.)  Unfortunately, there was no alternate “expert” picks opinion that I could turn to in order to compare the performance of a prediction market to any other prediction mechanism.

This year, however, was different.  I created a set of markets that encompassed the nineteen events of Henley Royal Regatta, the oldest and most premier rowing regatta in the world.  Then I discovered that another site had been created (in conjunction with the Regatta Radio station) that allowed individuals to submit their picks for who was going to win each event.  That site required that a pick be made for each event.

While I will be working with them to examine the detailed results, initial indications are clear.  Just before the deadline when picks had to be entered, I submitted an entry that represented the top-ranked competitor (by percentage) in each market.  That set of picks ranked #9 out of well over 200 entries, properly selecting 12 winners out of 19 events.  This is a similar performance to that discussed in the paper “Prediction Markets: Does Money Matter?” by Emile Servan-Schreiber, Justin Wolfers, David Pennock, and Brian Galebach.  Only two people selected more winning crews.  (One picked 13, the other 14 winners.)

I think the prediction market could have performed even better, but there was a lag between information coming available and the market moving.  Specifically there was a significant injury to one of the favourites just before entries for the picks event closed.  While that information was public, the prediction market didn’t see the effect for a number of hours afterward.

Again, I’ll be digging into the detail of this event (and others I’ve been running this summer), and will hopefully have a paper ready later this year.

As a last note, I would like to thank Inkling Markets, who agreed to keep the markets running for the research this summer.

Initial conditions are critical in the design of a new prediction market. The potential trading that can be done by traders in their first few experiences with the site can foster behaviours that encourage them to continually check back and trade further, or can contribute to behaviour where they never visit the prediction market again. There are a couple things to consider in the design.

Initial Stake

How much money will the traders have when they first log in? (This assumes that traders use play-money or are given equal amounts of real money to use.) There are different ways of approaching this. Inkling Markets, for instance, gives each trader $5000. Assuming that each stock is at a mid-point price of $50, they can only afford approximately 100 shares with their initial stake. The default options for purchasing shares at Inkling are 5, 20, and 50 shares, meaning that it is entirely possible that if a trader feels very strongly about some particular contracts, they will use up their entire stake trading in just two of them.

The Hollywood Stock Exchange has gone to the other side of the spectrum. They stake each trader with $2,000,000. A standard MovieStock is priced between $20 and $200, with default purchase options of 1000 contracts or 25000 contracts. With this initial stake, a new trader could purchase 20 different MovieStocks, all priced at $100 each, at the default lot price of 1000 contracts. That is a LOT of trading, and it is very likely that a new trader won’t use it that much in the first instance, thus causing them to come back to the site and trade again.

Timescales of contracts

The problem with some prediction markets is that most or all of the contracts on the site won’t be judged until some time well into the future. This provides little incentive to keep coming back to the site, and drives liquidity down. In these cases, it can be very valuable just to have a small set of contracts that expire in the short-term, even if they’re unrelated to the main objective of the site. For instance, MediaPredict is trying to find the hot new books and bands, but the contracts for the book contest wouldn’t be judged for several months after the site went live. Since then, they’ve offered contracts on events such as “Will Interpol debut in the Billboard Top 5,” “First day box office total for Harry Potter,” etc. This drives continued turnover and interest in the site, keeping the long-term contracts visible and more liquid than they otherwise would have been.

Again, the Hollywood Stock Exchange is a great example here as a trader can participate at any stage of a film’s creation, from pre-production all the way through to the first days and weeks at the box office. Since new films are out every week, there are always long-term and short-term contracts on which to speculate.

What this means for you

As always, your choices here are tied to your goals of your prediction market. Inkling is likely more concerned about manipulation, particularly in small user-generated markets, and thus limits the effect that any brand-new trader can have. The Hollywood Stock Exchange is big enough that no new trader is going to have much of an effect, and they are far more concerned about getting people to trade in a variety of contracts (thus providing more data that they can sell to the film studios).

Your choices will be affected by the number of people participating, if they are specifically selected and knowledgeable (or are general employees that join), and the information you’re deriving from the prediction market. Your choices for initial conditions are tied up in the overall goals for the project. As always, implementing a prediction market is a bit of an art as well as a science.

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Please contact Mercury Research and Consulting to discuss how we can help you structure your prediction market project.

I was recently e-mailed about a new website that was billing itself as a new prediction market.  It’s called “MainStreetWisdom,” and was apparently developed by some investment advisors in Dayton, OH.  Here is a small quote from what their e-mail:

However, under certain conditions – when a group loses its diversity and independence – a wise crowd can turn mad.  The stock market is usually made up of a group of diverse and independent actors and does a good job of pricing securities most of the time.  However, there are times when the market or pockets of the market loses its diversity and independence and prices become irrational.

This kind of thing irritates me, and is bad for the prediction market industry.  Sure, prediction markets could be used to predict stock prices, but why?  There are a number of financial instruments already out there that do this exact thing.  Perhaps more worrying is that the firm that developed this website could actually use this site to guide their own investment decisions.  Yikes!  True, the stock market isn’t necessarily an “efficient market” but there’s no way 30 guys in Ohio are going to consistently beat it by doing this.

The Inkling guys developed a similar website late last year called Worthio.  (It appears to have now gone dark.)  This was less a prediction market for the stock market than it was a community site around the stock market.  It had a Digg-like interface to vote on if you were bullish or bearish about a stock, discussions for each company, etc.  I was never particularly clear on how it would be useful, even if there was a lot of traders and information being shared.

Contrast this to what HedgeStreet has recently announced: prediction markets on earnings forecasts.  Any trader can go to HedgeStreet and try to profit from their own analysis of eleven of the market’s bigger companies to predict quarterly earnings.  I think this is a great application for a prediction market.  Currently, earnings forecasts are generated by various analysts at the various investment banks, and published/discussed in the run-up to the target company actually publishing the results.  These analysts develop the “Wall Street consensus” that is discussed in the newspapers.

By developing a prediction market for these key metrics, HedgeStreet allows traders to get in on the action by letting them profit on their own analysis.  Currently there is no aggregation mechanism for the various independent analysts; HedgeStreet now provides it and a profit opportunity.

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Prediction markets are market tools that can be used to predict key strategic data.  They are not tools to predict what markets are going to do.  Sites like the one discussed above confuse the issue for those that aren’t experienced enough to understand the difference.