A French example of poor “markets” in “predictions”
July 17th, 2008I read recently about an up-and-coming French company that is building what some people are calling a “prediction market.” Really, it’s just another mis-guided market in predictions.
The company is called MyPrognostic. They hope to get people on their site and make predictions. I wouldn’t classify them as a prediction market website because there is virtually no interaction past making the forecast. You can’t sell back your trades if the price rises, there’s really no way (as near as I can tell) for you to “make” money on the site via trading activity as you could on a standard futures market.
What it is, however, is an accounting system to see how good each person is at making forecasts. Once you’ve built up a reputation, you will literally be able to “sell” your forecasts to others. They believe there are customers that are willing to pay traders directly to see their forecasts.
The way MyPrognostic works is that users/traders are asked “Who will win?” a particular event/contract and provided with multiple options. They have no knowledge about percentages until they make their forecast, at which point the result is shown.
I see two major errors in this venture:
Error 1 – Finding the expert
The whole point of the Wisdom of Crowds book and general philosophy is that the crowd as a whole can consistently out-predict the expert. Certainly some experts may be better calibrated than the crowd as a whole, but it will be both very difficult to find them (due to the number of measurements required) and very difficult to stay there. How many mutual funds have consistently beat the S&P 500?
By moving away from the trading metaphor and just using a poll metaphor, I think MyPrognostic introduces some other problems. Presumably, traders will be much more likely to predict markets where there is a clear favourite, and much less likely to predict on markets where there’s little to separate the options. The problem with MyPrognostic’s model is that assuming the favourites do well, many users will look like good forecasters when all they are doing is forecasting the obvious. Presumably, a person could only trade events where the winner would traditionally have a 90% chance of winning and look like a much better forecaster than someone who was much better calibrated but traded a much wider variety of events.
I am always fascinated by businesses that start prediction markets in order to find the experts and then use their knowledge (usually to sell). The market itself is knowledgeable! You may find people that can beat the market’s consensus view in the short-term, but in the long-term few (if any) experts can maintain their position. I still think that tracking who does well in the markets (a la Google) is a great thing to do, but more to understand the dynamics of the marketplace, and not to isolate a portion of that marketplace.
Error 2 – Why would experts participate, anyway?
The only experts that I could see participating on this site are people that are so risk-averse (or lacking in capital) that they could not place the equivalent real-money bet themselves.
MyPrognostic is a little different in that you are only betting who would win a particular event, and not choosing to trade at a particular price. But at the same time, this is fairly equivalent to a typical “high street” bettor in the UK. (While some bettors examine the odds closely, others just place a bet on a particular person/team/event, no matter the odds.) If someone was a top trader on MyPrognostic they should be able to make real money by betting directly, instead of through selling their knowledge.
Summary
MyPrognostic is yet another site that is trying to leverage “The Wisdom of Crowds” to find and sell expert knowledge. I firmly believe they are mis-guided. Finding “experts” will be problematic, particularly since if they’re any good their greater incentive is to bet on a real-money site directly. I suspect they’ll figure this out in the next year or so themselves.
