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Cashing in on Online Prediction Markets 77

Posted by timothy
from the betcha-someone's-making-money dept.
garzpacho writes "BusinessWeek takes a look at the use of prediction markets to forecast business success. These markets have been taking the form of games online--the Hollywood Stock Exchange, for example, allows players to bet on the success of movies. Hollywood is currently one of the largest consumers of prediction market data, in part because movies' broad appeal leads to a large number of players, but also because the markets have been surprisingly accurate--92% in picking Oscar winners over the last three years. Because of this success, other industries are taking a look; pharmaceutical and tech storage businesses are currently working to set up their own markets."
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Cashing in on Online Prediction Markets

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  • by enitime (964946) on Monday August 07, 2006 @02:23PM (#15860752)
    "...the markets have been surprisingly accurate--92% in picking Oscar winners over the last three years."


    Only 92%? I'm sticking with The DaColbert Code [youtube.com].

    • I thought the DaVinci code was going to predict our future?

    • Is 92% "surprisingly accurate"? Only if Oscar winners are somewhat hard to pick, which they aren't. I'd bet I can pick more than half of the big categories correctly, despite never actually watching the movies; the surrounding hype is enough. Any competent film critic should achieve 90%.
      • Re:Surprising? (Score:3, Interesting)

        by andrewman327 (635952)
        Applying this system to business (especially pharmaceuticals) is a horrible idea. Oscars are selected in part by popularity. Of course the most popular movies will have the most votes. Predicting if Levoxyl can outsell Synthroid in the Pacific Northwest in Q1 2007 is another proposition entirely. I remember that the DoD tried something like this with terrorism but cancelled it because of public outrage.
        • Re:Surprising? (Score:2, Informative)

          by eikonoklastes (530797)
          Applying this system to business (especially pharmaceuticals) is a horrible idea

          Not necessarily. Allowing Joe Q. Public to partake in the market would be a bad idea. Allowing the designers, testers, etc. to (anonymously?) participate is a great idea. Check out The Wisdom of Crowds [amazon.com] for a great read.

          I remember that the DoD tried something like this with terrorism but cancelled it because of public outrage.

          Cancelled before it was ever used. It probably would have worked, too.

        • Re:Surprising? (Score:3, Interesting)

          by timeOday (582209)
          Applying this system to business (especially pharmaceuticals) is a horrible idea.
          Uh, that's what the stock market is. I'm not saying it's accurate, but it is how resources (money) are allocated in our global economy. "Betting on futures" for a movie? It's just a little more direct than buying stock in Sony.
          • I have always thought that this system works pretty well for things with almost full information. The stock market, on the other hand, is a cruel mistress and does not accurately predict the future.
  • by truthsearch (249536) on Monday August 07, 2006 @02:25PM (#15860771) Homepage Journal
    The Oscars are a popularity contest, so of course a prediction market will be accurate. Plus everyone knows if you throw in a mentally challanged main character or uglify a hot actress you're 10 times more likely to win the Oscar.
    • by Anonymous Coward

      Plus everyone knows if you throw in a mentally challanged main character or uglify a hot actress you're 10 times more likely to win the Oscar.

      Yeah, I was hopping mad when I saw how Ron Howard used CGI to digitally reduce Jennifer Connolly's bountiful bosoms in "A Perfect Mind". Anyone who saw her in "The Hot Spot" and "Career Opportunities" knows that something big was missing in Howard's film. Look, it was kinda neat how they removed Gary Senise's legs digitally in "Forest Gump" but removing the breas

    • by TubeSteak (669689) on Monday August 07, 2006 @03:06PM (#15861078) Journal
      The Oscars are a popularity contest, so of course a prediction market will be accurate.
      I find myself agreeing with that sentiment.

      From TFA: "The Hollywood Stock Exchange gives traders just enough information to be able to play the market."

      You don't have to worry about risk to predict the success of a movie.

      To do predictions for something like pharmaceuticals, you need vastly more technical information... something that pharma companys are loathe to part with (results of unreleased clinical trials for example).

      Otherwise, you're just guessing at the risks involved.
      • But there are people with vastly more knowledge of pharmaceuticals. And they already trade on the stock market. That's one of the advantages of markets. If you are vastly more knowledgeable in an area, then you get directly rewarded for that knowledge. If you're not vastly more knowledgeable, you can still use the prices listed on the market as a best guess to the value of the security (and any underlying probabilities).
  • Google (Score:2, Interesting)

    by Anonymous Coward
    When Google went IPO, I wanted to join in but had no idea what price it was going to emerge at and didn't want to overbid. Then I found out an exotic derivative was being marketed, betting on Google's IPO price. I watched the price of the derivative over the next few weeks; it stayed fairly stable, and I used its value to choose my price. The end result? I placed several bids at different values, and the lowest value I chose was $4/share over the final IPO price, meaning my entire order was executed (th
    • You seemed to have missed the point of the Dutch auction completely. What you should have done was *gasp* bid what you were willing to pay. If the price turned out to be lower than your bid, you would get the lower price, and if it was higher, you wouldn't spend any money on something you though was overpriced. You could still enter multiple bids if you wanted to get a different number of shares depending on the price. The point is, what the eventual IPO price would be should have had no bearing on your
  • Apply this to CS (Score:3, Interesting)

    by neonprimetime (528653) on Monday August 07, 2006 @02:28PM (#15860796) Homepage
    Maybe we should do this for Source Forge projects? Then we know which ones we shouldn't waste or time on.
    Or, we could do this with Linux Distros so we know which ones we should just abandon before wasting all our efforts.
  • The BBC have been running Celebdaq [bbc.co.uk] for years now. They used to have a weekly show for it on BBC3. That is based on media coverage over the past week though.

    I find these games entertaining on some small level. I've played Tradeover [tradeover.net] a little bit while I'm at work, that's a more realistic stock game. It would be stupid though to base the actual markets on the game, it's meant to work the other way around.

    Big money moves the markets. Wherever the big money goes at the point of sale is what matters mo
  • I predict:

    A:
    the gullibility of the american public, the inability of business groups to decide anything for themselves and the first step to trashy AI created and produced movies for mass consumtion.

    Q:
    What do computerized predictions really predict?

    May the dung beetles from 1000 camels crawl up your man-dress!

    (Apologies to Johnny Carson and American Dad)

    -What's the speed of dark?

  • More serious example (Score:5, Informative)

    by hcdejong (561314) <hobbes@xm s n e t.nl> on Monday August 07, 2006 @02:48PM (#15860966)
    StrategyPage runs a prediction market on geopolitical events [strategypage.com], with a similarly high success percentage.
    • by TopShelf (92521)
      MIT's Technology Review [technologyreview.com] magazine used to run a great set of market contests, called Innovation Futures. They had great prizes, of which I won a few (Sony DVD burner, HP Tablet PC, oodles of gift certificates, etc.).

      That was important because if you want people to really make these markets work, there has to be some incentive for them to do so.
    • The way their predictions are set up, their 89% success rate is thoroughly unimpressive. There are often several mutually exclusive choices (e.g., 2006 Kerry VP running mate choice), as well as repeated submissions of ridiculously longshot possibilities (which, quickly relegated to the CON scrap heap still bring up the accuracy average). I was amused, however, by how many people ended up getting the John Roberts confirmation wrong, because the wording said, "To replace retiring justice Sandra Day O'Connor",
    • I notice they have a DOW future on there. With such an illiquid market, I would imagine would could easily profit from the arbitrage between the site's DOW future, and one traded on a real exchange.
  • by rothlmar (982182) on Monday August 07, 2006 @02:53PM (#15860993) Homepage
    If you'll recall, a similar terrorism futures market was planned by DARPA; it fell victim to political pressure, got deep-sixed, and the proponent, John Poindexter, resigned in a cloud. But the truth is that the idea works well. Here's a summary of the controversy: http://www.wired.com/news/politics/0,1283,59818,00 .html [wired.com].
    • I think f--dcompany.com has been doing this for a long while...
      • I think they lacked certain characteristics of a real market. Ie, in a real market trading occurs when there's disagreement about the price of a security. OTOH, even if everyone agrees that company X is diving, you can still push your score up by going with the concensus view. I seem to recall that one of a few to get something right is more valuable, but following the concensus seems to pay off unlike a regular market.
    • by Anonymous Coward
      Yeah, I hated seeing that terrorism futures market get blasted for all the wrong reasons.

      A great book, The Wisdom of Crowds, goes over why futures markets work so well. Things ranging from judging the weight of a pumpkin to predicting within minutes of the Challenger disaster that the O-rings were responsible, have been foretold by futures markets or simple version of them.
      http://www.amazon.com/gp/product/0385721706/ [amazon.com]
    • No, I don't think it would have worked so well. Here's two reasons why:

      1. Not enough traders. Who's going to provide the liquidity for such a market? Where are the large mass of uninformed traders that provide the impetus for better informed traders to take advantage of their status? What's the bid/ask spread going to look like? Where are the market makers going to come from? It's worth noting that Tradesports does really well (high-volume) on things like sports and very poorly on wonky political happenings
    • If you'll recall, a similar terrorism futures market was planned by DARPA; it fell victim to political pressure, got deep-sixed, and the proponent, John Poindexter, resigned in a cloud. But the truth is that the idea works well.

      I don't think the problem was whether or not it would have worked. The trouble I see it is that a market would mean a lot of money riding on whether or not a terrorist act was committed. Which in turn creates a financial incentive for people to commit attrocities who wouldn't

      • This was addressed in the original market. The amounts of money traded would be limited so there wouldn't be half a billion dollars riding on such events. Plus, if the price does rise substantially on such a contract, it should be a clear warning sign. The market actually functions better if the terrorists and other insiders trade.

        This form of moral hazard isn't restricted to just terrorism. For example, stock option markets have similar problems. If there's enough options riding on a company, then it bec

        • This was addressed in the original market. The amounts of money traded would be limited so there wouldn't be half a billion dollars riding on such events.

          Interesting. I wonder how that would affect the performance of the market.Is the original proposal online anywhere? I have to say, I never saw it.

          This form of moral hazard isn't restricted to just terrorism. For example, stock option markets have similal problems. If there's enough options riding on a company, then it becomes worth it to conduct unla

          • Interesting. I wonder how that would affect the performance of the market.Is the original proposal online anywhere? I have to say, I never saw it.

            Dr. Robin Hanson, one of the founders, has some details on it. I couldn't link to that directly (URL doesn't work at the moment), but here's a good discussion [af.mil] of the market including the complaints.

            We're talking about giving corporate money a legitimate pretext to buy and sell violence. I can't help but worry that this would act to increase the overall supp

            • I couldn't link to that directly (URL doesn't work at the moment), but here's a good discussion of the market including the complaints.

              Thanks, I'll look forward to reading that.

              And I already mentioned how the market dealt with that.

              Yes, you said that limiting the supply of options in the options market eliminated *most* of the illegal activities. Which is probably a fair trade off when the commodity is oranges or shares in SCO.

              Plus, said violence is *still illegal*. So you haven't obtained a "leg

              • Ok, Robin Hanson's home page is here [gmu.edu], but it's still down. If I recall correctly, you have to click through to his personal page and then there's some betting markets related stuff. The PAM (Policy Analysis Market) stuff should be around there.

                Yes, you said that limiting the supply of options in the options market eliminated *most* of the illegal activities. Which is probably a fair trade off when the commodity is oranges or shares in SCO.

                But not so when it's airlines and reinsurance companies?

                Readi

                • Ok, Robin Hanson's home page is here, but it's still down. If I recall correctly, you have to click through to his personal page and then there's some betting markets related stuff. The PAM (Policy Analysis Market) stuff should be around there.

                  Thank you. The other link you sent me was very interesting.

                  Which is probably a fair trade off when the commodity is oranges or shares in SCO.

                  But not so when it's airlines and reinsurance companies?

                  I was thinking more of explosions and assasinations, my

                  • By limiting the players, the size of the bets and by only allowing the pentagon to issue bets, the exercise seems more like a focus group with propaganda opportunities rather than a proper market.

                    Given what actually happened, I'd have to say the propaganda opportunities just weren't there. but you have a fair criticism. The more constraints you place on a market, the less relevant it becomes. Still, it would have consisted of a fairly large pool of people in government, academia, and elsewhere. So ther

  • by mobby_6kl (668092)
    Shit, this reminded me to check HSX, and it looks like I lost almost $300,000 just this month! Despite being excellent movies, Clerks II and A Scanner Darkly aren't helping me at all. FSM bless Indiana Jones 4 and Pirates III though!
  • by ArcticCelt (660351) on Monday August 07, 2006 @03:13PM (#15861116)
    I understand that there is no real money involved. Do someone know a "good or recommended" web site with similar concept where you can cash on your knowledge and instinct?

    I just did a search and found two but I am not sure if they are any good:

    http://www.intrade.com/ [intrade.com] where you can in many political, entertainement and world events

    http://www.tradesports.com/ [tradesports.com] Mostly sports but also a bit of world events

    • Do someone know a "good or recommended" web site with similar concept where you can cash on your knowledge and instinct?

      Yes, try this one [nyse.com]. They don't explain it too well, but you're wagering on whether given companies will meet, surpass, or fail to meet others' expectations of how they'll perform. Sometimes you're even wagering on just how they'll perform, but normally you're wagering against how others think they'll perform -- that is, can you guess better than everyone else?

      • I went to drink an orange juice and then it hited me; Damn I forgot to preempt the obvious joke of "yes its called the stock exchange duhhhh". And there we go now :(

        Now I also just notice that booth links seams to be from the same company so before anyone say the second most obvious comment: "are you promoting your own web site/company", I'll say no, but if you don't believe me I'll say: "Do you want bet 100$ on that?".

      • Allright, I found two link of interest :

        The wikipedia article will give information plus a lots of links a the bottom http://en.wikipedia.org/wiki/Prediction_market [wikipedia.org]

        This resource will give you lots of links for real money and play money markets http://www.chrisfmasse.com/3/3/exchanges/ [chrisfmasse.com]

        Unfortunately after looking almost all the real money links I found no site that appear to be mainstream enough. However many of the play money ones seams fun and it cost nothing to try so enjoy!

    • I've tried Intrade. Tradesports is a division of the same company. You might want to run a few practice transactions on Intrade without putting up any money -- just so you can learn some of the pitfalls:

      One is the idea (which I shared for a while) that the majority on any contract position is almost always right -- read the news stories, after all, they all suggest the prediction markets are damn near infallible. But the majority position may be all wrong for most of the life of the contract and then rea
      • Very useful information you gave here, I will probably try it. However, what you said about the liquidity of the market is what I was fearing the most and that's why I was trying to find the most popular one (with the most volume).

        Is this the most popular site of its kind? Is there a bigger competitor somewhere? I'll keep looking and post it if I find something in cases anyone wants to know.

      • Tradesports is of the opinion that North Korea did not launch a test missile that left their airspace on July 4th, by the way. At least that's how they resolved the bets. Way too much information on the fiasco here [chrisfmasse.com]
        • Contract resolution is an ongoing problem. Tradesports is lucky that they haven't picked up a more controversial case by now. But to be honest, it's really hard to word contracts like this.
    • The Iowa Electronic Markets is one of the oldest futures markets of this nature. It's real money (though you can only 'invest' $50), and completely legal. Most of the markets are related to major elections, but there are a few others (like fed. policy and MSFT price). I'm been an active trader since the 2000 election and it's been pretty interesting. http://www.biz.uiowa.edu/iem/ [uiowa.edu]
  • Old field (Score:5, Interesting)

    by tansey (238786) on Monday August 07, 2006 @03:15PM (#15861127) Journal
    This is actually a fairly old field of statistics. The story goes that a mathematician at a state fair saw there was a contest to see who could guess the weight of a pile of recently slaughtered beef. Everyone was allowed to guess at it: farmers, house wives, butchers, etc. In the end, the experts (i.e. the butchers) didn't win, and their answer was off by about 10%. However, the total of all the answers, averaged, was off by only .2 lbs.

    This sparked the idea that the knowledge of the whole group can lead to better answers than the knowledge of a select group of experts. It's also been shown to be true with things like artificial intelligence and mathematical proof programs.

    So it seems like hollywood and the like have just finally realized that the entire group of people can do better at predicting movie success than just some panel of marketing experts.
    • Re:Old field (Score:2, Informative)

      by renfrow (232180)
      This idea, that while nobody knows the answer, but, everybody knows the answer, was one of the plot devices in the book 'The Shockwave Rider' [wikipedia.org] by John Brunner in 1975. One of my top ten favorite scifi books.
    • Markets have a big advantage over polls in several ways. Communication between the participants occurs, you can express the degree of confidence you have (by buying more or less), and the best possible answer is merely the market price spread.
  • Everyday predictions (Score:1, Informative)

    by Anonymous Coward
    Even without groups of people, individual predictions of phenomena for which there is a common intuition can be surprisingly accurate. See "Optimal predictions in everyday cognition" [mit.edu], reviewed [economist.com] in the Economist.
  • ...is that BusinessWeek's webserver is about to burst into flames!
  • by exp(pi*sqrt(163)) (613870) on Monday August 07, 2006 @06:46PM (#15862630) Journal
    ...discussed here [blogspot.com] where you can buy stock in your favorite flu virus [uiowa.edu]. Apparently it performs well in predicting flu outbreaks.
  • The "Delphi Effect" (Score:3, Informative)

    by farrellj (563) on Monday August 07, 2006 @09:05PM (#15863292) Homepage Journal
    This is a well known phenonena, and has been used for a long time now. If you ever read the book "The Shockwave Rider" by John Brunner, and shame on you if you haven't, you will recognize the "Delphi Boards". They were basically a legalized betting system that allowed you to wager on the possiblity of something happening...for example, a cure for cancer. I won't go more into the story, but you can check it out for yourself!

    It is technically known as the Delphi Effect, and you can read more about it here:

    http://en.wikipedia.org/wiki/Delphi_effect [wikipedia.org]

    ttyl
              Farrell

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