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May 27, 2006

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Robin Hanson

The idea of a decision-contingent prediction market is powerful and has wide application, including in corporate governance. FYI, over ten years ago I tried to publicize the general applicability of this approach, and illustrated it with corporate governance examples. For example, see http://hanson.gmu.edu/dumpceo.html . Over the years I didn't have much success getting academic journal referees to publish my suggestions. I presume and hope a Chicago law school prof will have better odds.

Todd Henderson

Thanks for commenting (and reading), Robin. Indeed, your work has been a tremendous inspiration, and we use it as a foundation for many of our ideas. As for the failure to get these ideas published, I think it has more to do with the march of progress than anything else. The work of yours and others in the intervening years has made the case for these markets, both theoretically and practically, much stronger. While some of the suggestions we consider are more radical and future-looking, many are implementable today by firms, as our interviews with market participants suggest. If you would be wiling, I'll send you a copy of the paper for your comments.

Robin Hanson

I'd love to comment on your paper, and hope that it can help entice some firms to try this stuff on non-trivial decisions.

Chris. F. Masse .COM

Hello Chicago,

Do you have marketing data suggesting that play-money or real-money traders would be interested in these topics?

No liquidity, no trader satisfaction, and no predictions.

The predictive power of the prediction markets is an offspring of their liquidity.

Speaking of the alternatives to CDA, still you need trader interest.

As for your paper, I'd happy to list it.

Ciao,

Jason Ruspini

Chris, Your question seems to assume that it would be beneficial to open the markets to the public. This again sounds like the exchange industry perspective, and doesn't speak to prediction markets in the strict sense. Conceivably (though there will most likely be a de facto blending), the former may always be larger and more profitable, just as the housecleaning industry is today.

If we, for the sake of argument, reduce "liquidity" to the number of motivated traders, it's not clear where the marginal informational gain levels-off -- the number of traders such that you have adequately captured the full distribution of opinion. In a real-money market the distribution of budgets may actually degrade the informational interpretation of price, as certain biases can have a disproportionate effect on the market (although this would be somewhat canceled by the fact that a large budget might correspond to past success in the market). With equal starting budgets, this number is in most cases probably more than say 30, but insofar as the information is valuable, the company might prefer to not give it away by immediately making the prices public, which would be the way to maximize liquidity. The optimal number of traders from the perspectives of companies may well be in the hundreds or low thousands, and might be limited to employees and contractors who will be encouraged to not leak the markets' information. Rewarding the employees with real-money will be simple if done through bonuses, and there would be sufficient motivation.

Michael Abramowicz

Chris,

I'm not sure why you think that heavily subsidized markets using Hanson's market scoring rule would not solve the problem. A sufficiently large subsidy should create trader interest, and anyway Hanson's approach should still give honest forecasting incentives even if only a very small number of people are participating.

And we will certainly send you the paper once we have a draft. Thanks for all your great work on compiling information about prediction markets (invaluable for me in compiling information for a book project that I am currently completing).

Chris. F. Masse .COM

A prediction exchange (a.k.a. betting exchange) serves two purposes: 1. Primarily, aggregating the maximum possible of speculators (including those willing to make bets in the mainstream people's opposite directions). 2. Secondarily, generating probabilistic predictions that could be of interest to commentators and, possibly (that's what Robin Hanson brought to civilization), decision makers.

Now, let's say you have an internal corporate prediction market on a Sarbannes-Oxley topic, where traders are subsidized. You say that a "sufficiently large subsidy should create trader interest". I would like to question this statement.

a) Are you sure that the traders are interested both in making money thru speculation and in the Sarbannes-Oxley topic? Or would they lie to you about the latter because they'd be aim at the former only. It won't work if the trader interest is artificial.

b) To paraphrase what NewsFutures' Emile Servan-Schreiber said the other day (about play money speculators), in your scheme, the traders "are not risking one cent from their own pocket". If traders risk their own money, then there's a self-selection process. That way, the clueless people decide to stay out of the trading.

c) Of course, a) and b) can be rebutted by saying that what counts is to have at least, say, 15% of informed traders (taking over the uninformed traders). Then I ask the tough question: What marketing data do you have that convinced you that knowledgeable executives and managers would spend work time at the office playing this trading game?

Time is the most precious element that these people have. I know that for a fact, since most of my subscribers read my site feed from the office, on weekdays. And when they interact with me, they ask me the hard questions about the usefulness of prediction markets.

To come back to my two introductory points, most scholars put an emphasis on #2, and overlook #1. There's no other way that the marketing approach in order to research trader interest. Asking people; watching their behaviors; testing. That's an area of research snubbed by the scholars. Minding #2 without minding #1 is like rowing with one arm only; you perform circles but you go nowhere.

Good luck with your paper. I hope that many readers will make harsh comments, because that's an incentive for progress.

Michael Abramowicz

Hi again Chris,

I agree with what you say for a scheme in which the traders are not risking a cent. Our intent was simply to say that perhaps even without subsidy, prediction markets can be effective, but we do not make any strong claims about that. Our broader focus is on hypothetical subsidized markets. With enough subsidy, people who know about the topic should be drawn to participate, and even "artificial" interest should be enough to generate meaningful predictions.

I do agree that analysis of actual markets and user behavior is an important area of research (though one in which I have not been much involved). At the same time, one should be cautious about inferring much from small-stakes markets about what would happen if we had markets with subsidies in the millions of dollars.

alex kirtland

Hi. This is a great discussion. I would love to see a draft of your paper, too, when it's available. I'm particularly interested to hear what prediction market ideas companies think can be implementable today.

Also, Chris is asking the right questions. Adoption (or generating appropriate levels of liquidity, if you prefer), is a difficult problem for any new corporate application to overcome. Currently, corporate wiki's and blogs are facing the same hurdle. Everyone can imagine how useful they would be (just look how successful they are outside of companies), but getting companies to use and adopt them for internal use is easier said than done.

Cara Fletcher

The success of those "prediction markets" run by the university of Iowa is really good and they know what are they doing.

Grants

The Government Grant provision federal agencies could well be applied to by using this electronically mediated agency. The different options available could well be identified and utilized. In contrast the Catalog of Federal Domestic Assistance could well be accessed to identify and utilize the diverse grants and assistance available for Government Grants.

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