An assortment of prediction market topics
November 26th, 2008So a number of interesting things have come across my desk recently, all of which I wanted to write about but none of which really became its own post.
Askmarkets.com has launched!
George Tziralis’s new project, Askmarkets, has now officially launched. George has been beta-testing it for a while, so it’s great to see it officially go live.
The most unique thing about Askmarkets to me is that it uses David Pennock’s DPM (Dynamic Pari-Mutuel Market) as an automatic market-maker instead of Robin Hanson’s MSR (Market Scoring Rule). It largely operates the same way, though with a DPM the person/company running the market isn’t required to subsidize the market-maker losses. (This theoretically makes it more attractive for eventual real-money applications.)
Nostradamical.com has launched
This is a new prediction market site that I heard about recently. It seems like a decent site, and I really like that it was developed by just one guy (Brad Young) here in the UK! While you can show your confidence in a particular outcome through a slider, I don’t like that I can’t adjust how much I “bet” on a given outcome. While I might be very confident about something in my industry, I wouldn’t want to bet the same amount on a pop culture topic. (I’m likely the last to know any Britney Spears news.)
Good luck to Brad as he improves and expands the site!
CFTC new scope?
The CFTC may be gaining a much broader new scope. If Senator Harkin passes his bill, it “would force all over-the-counter derivatives, including credit-default swaps, onto regulated futures exchanges.” This would be overseen by the CFTC.
To quote some interesting lines from the Wall Street Journal article:
[...]those financial contracts would be standardized and centrally cleared. It would also mean that they could be subject to CFTC-imposed speculative position limits and federal reporting requirements.
Under current federal law, certain financial derivatives are excluded from the definition of a commodity. The law, which was amended in 2000, created distinctions between what are known as “exempt” and “excluded” commodities.
The CFTC has no regulatory authority over excluded commodities, which include credit-default swaps. Transactions involving exempt commodities, such as metals and energy, may not fall under some of the CFTC’s rules and regulations if those contracts meet certain requirements.
Sen. Harkin’s new bill, dubbed the Derivatives Trading Integrity Act, would eliminate the distinctions in the law between excluded and exempt commodities, treating them all the same.
Hedging versus Gambling
Speaking of the CFTC, I was talking with some people recently about how to define the difference (in more layman’s terms) between hedging and gambling. The central question was: is there an inherent risk?
The classic case is that of farmers having a risk of their crop prices changing dramatically during the growing & selling seasons. The Chicago Board of Trade helped farmers hedge their inherent risk of significant market changes between the time they planted their crops and when those crops could be sold.
That can be contrasted to sports, which are typically understood as gambling. While some individuals may have emotional risk tied up in a teams’ win or loss, there is no inherent risk… sports are entertainment first and economic enterprises second.
In the middle, however, are contracts on something like the US Presidential election. A change in government ripples across the economy, and so businesses and individuals may very well have some risk in various election outcomes.
So while the question “is there an inherent risk?” helps to clarify some situations, there is still a spectrum of answers. While this may be second nature to some or many readers, I think it’s a better question to help separate hedging from gambling in many novice/lay-person’s minds.
Google Prediction Markets case at HBS
Andrew McAfee is a professor at Harvard Business School who does a lot of work, research and teaching on “Enterprise 2.0″. He has worked with/talked to Bo Cowgill at Google and has written a case study on Google’s prediction markets.
He’s also a twitter user and I wanted to quote one of his “tweets” here:
Google prediction markets case teaches like a dream – http://snurl.com/5q78q
I personally think this is a really good, solid step towards recognizing prediction markets as a valid and valuable internal tool. Hopefully more and more people will come into business knowing that prediction markets exist and that they can provide valuable information to managers about what their company is doing.
My HubDub post-election market
Finally, I put up my own post-election market on HubDub, on US Supreme Court justices. Please check it out below and trade!
