Notes from the London Prediction Market conference, part 1
October 17th, 2007Thank you to everyone who attended the London Prediction Market Summit last week. I think it was a great event, and exposed the industry to a lot of new (or lesser known) people, companies, and examples in prediction markets.
The following are my first section of notes:
** Bernd Ankenbrand – gexid **
Bernd’s presentation focused on the work he did with Nokia on prediction markets. Nokia used prediction markets (using the gexid software) to forecast KPI’s, and had about 120 participants. (KPI = Key Performance Indicator.)
One note from Bernd’s presentation that I found interesting is that Nokia first defined and communicated what the different KPI’s meant on an internal site. Despite the importance to management, the average employee didn’t necessarily know which KPI’s were being measured or what they were. The project led to a unique learning experience for many of the participants.
He did a lot of research on the participants, and I wanted to mention one specific correlation. The heaviest traders on the site were those that most valued anonymity and monetary incentives. While this may seem obvious, it is important to catalog.
When it came to forecast accuracy, Bernd did say that it wasn’t terribly good. But what was really important is that compared to the existing forecast, the prediction markets were an improvement. This is something James Surowiecki has mentioned before: prediction markets aren’t a crystal ball, but they are almost always better than any existing forecasting method.
Finally, congratulations to Bernd for finishing his PhD!
** John Delaney – InTrade **
The week before the conference, John e-mailed the Prediction Markets Google Group to ask what questions people at the conference would want him to answer. His presentation addressed both what was e-mailed to him on the group as well as via personal messages. I’ll address the important/interesting points here.
It’s obvious that John wants InTrade to be much more successful than it has been, but he still clearly believes that InTrade can still be very successful. He mentioned that one key in their business is market makers; a few of their former market makers left, and that had a significant impact in the categories in which they participated. The new gambling laws in the US has had a significant impact on their business, but John is optimistic about the long-term potential of the industry in the States.
Regarding InTrade and TradeSports, John was clear that the companies are separate legal entities, with different management and employees. That said, he said that like a divorce, there are still connections between the two that take some time to replace. They are also looking into ways that individuals can submit contracts to trade on the exchange, similar to what you can do at Inkling. Clearly this would still be fairly tightly controlled, and judgement of the contracts would be done outside of InTrade by an independent entity.
John is disappointed that InTrade hasn’t grown more than they have. At the same time, he seems to be very optimistic about InTrade because their employees are still very motivated and morale continues to be strong. He also said he would fly to the US, but it would need to be for a good reason.
Finally, John addressed the infamous North Korea missile market. He was asked, “Was it a mistake?” He said both No and Yes. It wasn’t a mistake in that the market was judged according to a strict interpretation of the rules. At the same time, it was a mistake in that they didn’t handle the PR issue particularly well. His lesson learned was that they simply need to be incredibly careful regarding their market definitions.
** Mat Fogarty – XPree (formerly EA) **
EA produces approximately 120 games per year. While they forecasted quality of their products internally, there was little accountability for the forecasts. This made for poor forecasts, and so executives didn’t really know which products truly stood out, and which didn’t. This caused them to regularly fill their supply chains with products that just wouldn’t sell in those volumes, a money-losing proposition.
Mat managed to pitch the CEO, and received good support. From that, he managed to drive the project through. What he found was that he got support at the two extremes of the company; the executives liked it because they were being told better truth, and the lower-level employees liked having a forum where they could tell the truth unfiltered. Mat found the most resistance from the middle management in EA.
EA’s first prediction markets were run on product quality, using Metacritic scores to cash out the contracts. (Metacritic produces well-regarded benchmark scores for the industry by aggregating and scoring reviews.) Prizes such as game consoles were given periodically, based on a lottery weighted by a users net worth, and each week the top trader received a stein.
How well did they work? Well, the previous error rate on games was 6.6%, and prediction markets nearly halved it, to 3.5%.
Mat also provided some interesting demographic information on traders, but my generalisation of it is that the more junior people were more likely to register, to trade, and to be profitable.
Finally, Mat introduced his new prediction market company, Xpree. Their software is really focused on maximising participating in a prediction market by making it tremendously easy for users and administrators to participate. He showed some early screenshots of sliders and other new user interfaces which essentially remove the standard trading interface for ease of use. They have started using this software within EA to start predicting ship dates for products and product sales figures.
Finally, they talked about incorporating a wiki into the process. A user could short-sell a contract, and then be directly to a wiki where they could explain why they traded the way they did. It will be interesting to see how this is implemented and utilised. My opinion is that if people have to sign their name (even user name) to wiki comments, it might be difficult to get them to tell the truth.
** Leighton Vaughn Williams – Nottingham Trent University **
Leighton gave a great presentation that explained the various boom and bust cycles of betting and taxation in the UK from World War II onward. He has done a lot of work in the past decade with the government to reduce the taxation on betting.
In 2001, tax law on gambling was changed from a turnover tax to a gross profits tax. This encourages a low-price, high-turnover strategy, compared to the previous high-price, low-turnover strategy. For the betting public, tax was effectively axed. From a betting turnover of £7billion in 2001, this rapidly grew to £53billion in 2007. Though tax rates were cut, revenue stayed neutral and an entire industry exploded in growth.
Finally, Leighton really stressed the Journal of Prediction Markets. If you aren’t already a subscriber, please sign up! An digital subscription is only £30 a year, and if you want a paper copy as well it’s only £49 a year. You can sign up for a free trial here: http://www.ingentaconnect.com/content/ubpl/jpm, or contact Christopher Woodhead for more details. If enough interest in the Journal cannot be sustained through subscriptions, the future of the publication may be in doubt. It’s academic, so they aren’t necessarily looking to turn a profit- just break even.
Additionally, they are always looking for more articles, and they don’t necessarily have to be strictly “academic.” Interesting practical studies on prediction markets, including corporate prediction markets would also be very welcome.
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This has already been much longer than I originally thought, and I’ve got quite a few more speakers to write about. Please check back soon for more…
