Prediction Markets for the stock market? Huh?
July 2nd, 2007I 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.
July 16th, 2007 at 5:29 pm
Guys, the EPS contracts on HedgeStreet are a fun way to make money.
I took a long position on the Google EPS contract, which is going to expire in the next 2 days. Now the odds in my favor are 96% to 4% (almost certain that I will win!).
Check it out on:
http://www.hedgestreet.com/trade/active-trader.html
-Click at the Earnings tab and select Google EPS
You still have 2 days for Google EPS contract to expire. Take a look yourself.
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September 23rd, 2008 at 7:15 pm
I agree that it can be a little confusing to people who are just getting a grasp on the basics of stock analysis. Truth be told, there's never going to be any kind of market or system that will be able to fully predict the ridiculous things that greed-driven people will do.
September 26th, 2008 at 2:39 am
Hey,Its quite interesting.How to join in this community ? I'm very excited to know more about this new prediction market.
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Is the news something you can actually act on? Are prices going down as quick as they go up?
It’s the story of the tortoise and the rabbit. At the heart of things, we would all love to be the rabbit. But as quick as the price goes up, it can go back down. However, with the slow and steady method, you follow a well researched investment plan. Sure, it’s not flashy, but the chances of you making money in the long run are MUCH higher, and because you’ve diversified your portfolio, you also reduce your chances of losing your money to a particular bad event.
So, while a stock tip MAY make you money, it may lose you money. But more millionaires are made the slow and steady way than are made with a single tip. So, go the proven way and follow your investment plan.
November 13th, 2008 at 10:54 am
 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
November 14th, 2008 at 10:40 pm
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
November 15th, 2008 at 3:46 am
Delete
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Jed D. Christiansen
jed.christiansen@mercury-rac.com
+44 (0) 796 358 3663
http://www.linkedin.com/in/jedchristiansen
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January 19th, 2009 at 1:10 pm
I'm bullish for the market in general, but like everyone taking a watch and see right now. We've already had some runners this year, but we're being careful to give out good picks. The inauguration is tomorrow and who know what will happen over the coming weeks and months and how that will affect the market.
I'm all for tools, but the way we find the good one on our end is by being in touch with our contacts and finding out who is getting ready to push something strong. No crystal ball on this end, jut “nose to the grindstone”, but that's the way I like it.