Introduction to Special Issue on Corporate Applications of Prediction Markets
Author: Strumpf, Koleman (Univ of Kansas)
The Innovation Engine at Rite-Solutions: Lessons from the CEO
Author: Lavoie, Jim (Rite-Solutions)
The Challenge of Incentive Alignment in the Application of Information Markets Within an Organization
Author: Hall, Art (Center for Applied Economics)
Examining Trader Behavior in Idea Markets: An Implementation of GE’s Imagination Markets
Authors: Spears, Brian; LaComb, Christina; Interrante, John; Barnett, Janet; Senturk-Dogonaksoy, Deniz (GE)
The Design of Idea Markets: An Economist’s Perspective
Author: Ottaviani, Marco (Kellogg School)
Hanson’s Automated Market Maker
Authors: Berg, Henry; Proebsting, Todd A. (Microsoft)
On Market Maker Functions
Author: Hanson, Robin (George Mason)
Inkling: One Prediction Market Platform Provider’s Experience
Author: Siegel, Adam (Inkling)
“The Emergence of Prediction Markets within Business Firms: A Skeptical Perspective from an Intrigued Academic.”
Author: Rhode, Paul W. (Univ of Arizona)
Private Prediction Markets and the Law
Author: Bell, Tom W. (Chapman)
Comment on Bell Article
Author: Litan, Robert E. (Kauffman Foundation and Brookings
Luckner, S. & Weinhardt, C. (2008). Arbitrage Opportunities and Market-Making Traders in Prediction Markets, Proceedings - 10th IEEE Joint Conference on E-Commerce Technology and the 5th Enterprise Computing, E-Commerce and E-Services, CEC 2008 and EEE 2008, art. no. 4785047, pp. 53-59.
Abstract. Prediction markets are a promising approach for predicting uncertain future events and developments. These markets will work well if they are efficient and in efficient markets, one does not expect arbitrage opportunities to be persistent. This paper therefore studies whether pure arbitrage opportunities existed in a sports prediction market. Moreover, market liquidity can become an issue in prediction markets since new information is potentially not immediately reflected in trading prices and traders might also lose interest in the markets if they are il liquid. This paper therefore analyzes whether traders try to exploit il liquidity by taking on the role of market makers in prediction markets. Our analysis of a sports prediction market for the FIFA World Cup 2006 shows that prediction markets also appear to be efficient in the sense that there are few substantial arbitrage opportunities available. Furthermore, we find that market markers play an important role in prediction markets. They serve as liquidity providers and allow for continuous trading.
Two new papers on prediction markets, presented at the 2007 workshop on The Growth of Gambling and Prediction Markets: Economic and Financial Implications, have now been published in Economica 76(302).
Wolfers, J. & Zitzewitz, E. (2009). Using Markets to Inform Policy: The Case of the Iraq War, Economica 76(302), 225-250.
Abstract. Financial market-based analysis of the expected effects of policy changes has traditionally been exclusively retrospective. In this paper, we demonstrate by example how prediction markets make it possible to use markets to prospectively estimate policy effects. We exploit data from a market trading in contracts tied to the ouster of Saddam Hussein as leader of Iraq to learn about financial market participants' expectations of the consequences of the 2003 Iraq war. We conducted an ex-ante analysis, which we disseminated before the war, finding that a 10% increase in the probability of war was accompanied by a $1 increase in spot oil prices that futures markets suggested was expected to dissipate quickly. Equity price movements implied that the same shock led to a 1.5% decline in the S&P 500. Further, the existence of widely-traded equity index options allows us to back out the entire distribution of market expectations of the war's near-term effects, finding that these large effects reflected a negatively skewed distribution, with a substantial probability of an extremely adverse outcome. The flow of war-related news through our sample explains a large proportion of daily oil and equity price movements. Subsequent analysis suggests that these relationships continued to hold out of sample. Our analysis also allows us to characterize which industries and countries were most sensitive to war news and when the immediate consequences of the war were better than ex-ante expectations, these sectors recovered, confirming these cross-sectional implications. We highlight the features of this case study that make it particularly amenable to this style of policy analysis and discuss some of the issues in applying this method to other policy contexts.
Hanson, R. & Oprea, R. (2009). A Manipulator Can Aid Prediction Market Accuracy, Economica 76(302), 304-314.
Abstract. Prediction markets are low volume speculative markets whose prices offer informative forecasts on particular policy topics. Observers worry that traders may attempt to mislead decision makers by manipulating prices. We adapt a Kyle-style market microstructure model to this case, adding a manipulator with an additional quadratic preference regarding the price. In this model, when other traders are uncertain about the manipulator's target price, the mean target price has no effect on prices, and raising the variance of the target price can increase average price accuracy, by boosting the returns to informed trading and thereby incentives for traders to become informed.
Crossposted from appliedforecasting.com
This week's alarms over swine flu may have come as a shock to most people, but not to experts in threat prediction: One company said it began warning public-health agencies about the potential for a pandemic weeks ago. Prediction experts have set up a market to forecast the flu outbreak's future.
Unpredictable? Just try telling that to Forrest Nelson, an economics professor at the University of Iowa and one of the principal investigators for the Iowa Electronic Health Markets. The IEHM, which was spun off from the successful political prediction markets operated by the University of Iowa, started up a swine-flu prediction market just today.
"There's so much uncertainty and confusion out there, we decided if we could contribute something, this is the time to do it," Nelson said. The IEHM has been experimenting with flu prediction markets for five years: Public-health officials, hospital workers and others in the health-care profession can become "traders" in a market aimed at rewarding those who accurately forecast how flu outbreaks spread.
Nelson said the markets have been "pretty good at predicting flu activity about three or four weeks out." To be more precise, the consensus four-week prediction matched the actual activity level (measured on a five-level scale) 80 percent of the time, he said. Unlike the IEM's political markets, the IEHM's swine-flu market will not be open to the general public (although we can watch), and it won't use real money.