Prediction Markets Update

Prediction markets continue to offer great potential to improve society at many levels. Their greatest promise lies in helping organizations to better aggregate info to enable better key decisions. However, while such markets have consistently performed well in terms of cost, accuracy, ease of use, and user satisfaction, they have also tended to be politically disruptive – they often say things that embarrass powerful people, who get them killed. It is like putting a smart autist in the C-suite, someone who has lots of valuable info but is oblivious to the firm’s political landscape. Such an executive just wouldn’t last long, no matter how much they knew.

Like most promising innovations, prediction markets can’t realize their potential until they have been honed and evaluated in a set of increasingly substantial and challenging trials. Abstract ideas must be married to the right sort of complementary details that allow them to function in specific contexts. For prediction markets, real organizations with concrete forecasting needs related to their key decisions need to experiment with different ways to field prediction markets, in search of arrangements that minimize political disruption. (If you know of an organization willing to put up with the disruption that such experimentation creates, I know of a patron willing to consider funding such experiments.)

Alas, few such experiments have been happening. So let me tell you what has been happening instead.

For example, some public markets, such as PredictIt continue to function, and others, such as InTrade, have gone away. While I wish such markets well, I’m not that optimistic about markets on broad public questions, sold to the public, relative to markets on specific organization questions, funded by those organizations. I’m skeptical that there is much public demand for betting on odd questions, or that such markets do much to promote the more promising organizational markets.

Academics and their patrons have showed continued interest, but mostly in the form of abstract efforts such as papers, theorems, and lab experiments. We continue to collect an overhang of abstractly promising mechanisms that haven’t been tried in real organizations. (Including my combinatorial prediction markets.)

A few books have reached wide popular audiences, but mainly by focusing on signs that readers can use to tell themselves that they are better forecasters than their rivals. For example, The Wisdom of Crowds lets ordinary people tell themselves that those damn self-appointed experts are over-rated, compared to we wise crowds. Superforecastors gives several other indicators that readers can collect to tell themselves they are better. While the authors of these books clearly favor creating more markets, they are aware that this isn’t the readers’ priority.

In business, the firms who a decade ago tried to sell straight prediction market software and services to firms for their key decisions have mostly either gone out of business or switched to safer related products. These related products tend to keep the appearance of markets but undercut their main incentive benefits, and they tend to stay away from topics on which key firm insiders might express opinions.

For example, “innovation markets” suggest new research or development projects for firms to pursue. But instead of betting on the consequences of starting such projects, which would take years to see, they just bet on which projects will be funded. And
prediction market research” replaces focus groups with an interface where users seem to bet on which products will be more popular. Except they are just taking a survey, not actually betting on real outcomes.

The last few years has seen great interest in “blockchain” technology and ventures. While these are often used for illegal purposes, authorities have not cracked down as much as they might, as blockchains are new and sexy and promise many non-illegal and useful applications. However, these other applications have been slow in coming. I expect that if blockchains do not soon deliver a majority of their activity as legal laudable applications, authorities will crack down. And while hardcore fans may do what it takes to continue to use them even in the face of such a crackdown, most users will cave and quit, resulting in far lower activity levels.

Many firms have recently issued “crypto coins” to support their blockchain efforts, and current market prices suggest that speculators see a substantial (even if low) chance of large future blockchain activity levels. Even if the underlying technology has promise, such market prices can still be in error in either direction, and it is my opinion that such prices are now too high.

Prediction markets are one of the most frequently mentioned blockchain applications, and I’ve advised several related ventures. As sports betting seems one of the most likely uses of such blockchain based prediction markets, it isn’t clear that activity in this area will count as the legal laudible applications that blockchains need to survive. Even so, many are pursuing this possibility.

Overall blockchain based ventures tend to be heavy on algorithms and software, and light on all the other inputs needed to make a successful business venture. Many of these ventures seek to create general platforms, and hope that other more specific ventures will fill in the more specific business details.

The first firm to issue a blockchain prediction market coin was Augur, two years ago. They still haven’t delivered their software product, but they say they are close, and hopefully extra quality and reliability will result from their extra effort.

Gnosis issued their coin back in April, and they also say they are near ready to deliver their software. They also plan to do a set of experiments to test decision market variations. Both Augur and Gnosis are focused on creating general platforms, expecting others to fill in the specific betting topics and to do the marketing to attract specific customers.

Stox issued its prediction market coin last month. They say they plan more to team with existing trading websites: ”Stox incentivizes other industry leaders with existing customer bases, like invest.com, to join the Stox network and drive traffic to the network.” But they have yet to announce specific teaming deals.

Enjin is issuing its coin now. Instead of supporting prediction markets, Enjin says its coin makes it easier to trade assets from games like Minecraft, even without the support of the makers of such games.

I wish all these ventures well, though I fear a blockchain price crash is coming soon, and I wish there was more of a focus on selling organization over amateur prediction markets, and on particular business applications, rather than general software platforms. But it isn’t yet too late for someone to start to focus there.

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  • vandivier

    Why Augur over good ol’ BTC denominated bitbet? a seperate coin seems a barrier to entry.

    I’m having a hard time figuring out the firm-specific use case for an SME. For a large business, say Oracle, it makes sense.

    many businesses can leverage the current PredictIt flavored questions as market research

    What is the main issue with implementation? I totally don’t know but I think increasing participation has been hard in the case of bitbet, maybe for other reasons

    and I’m interested in the possibility that margin traded prediction market derivatives can substitute for lottery tickets at 7 eleven. Sounds like a joke but it’s not. Turn the stupid tax into a learning incentive

    • http://overcomingbias.com RobinHanson

      BitBet is not a betting market but is instead a parimutuel, where your incentive is to bet at the last possible moment before bets are closed.

      • vandivier

        I have never heard that word and defer to your knowledge, I will read more about parimutuels.

        But, I will point out that BitBet has a penalty for betting later; there is a discount factor over time applied to your possible winnings, not sure if it matters

        also that discount factor irks me it seems arbitrary but at the same time i understand the need: wondering if there is a relatively objective standard for such discount rates

      • http://overcomingbias.com RobinHanson

        The FAQ says there are weights, but doesn’t explain what they are. If early bets get a strong enough weight, then the incentive is to bet as soon as possible. It is very unlikely that the actual weight makes it ideal to bet at any time other than the early or latest possible moments.

    • http://overcomingbias.com RobinHanson

      Predictions is a bicoin betting market, where it can make sense to bet at times other than the first or last possible moment. But they charge high fees, comparable to an ordinary bookie. https://predictious.desk.com/customer/portal/articles/1222008-what-are-the-fees-on-predictious-

  • sflicht

    There’s a fundamental question of bitcoin maximalism versus the alternative of many coins for many purposes. I wonder if Robin will weigh in from a market design POV.

  • lump1

    Is there enough flexibility in any of these blockchain-based setups to implement a proper prediction market with conditional bets? Blockchains have a long memory, they tend to already be tied to currency, and they’re not going to be knocked out by some nation’s anti-gambling laws. That seems like a good start. What else needs implementing? What’s the best way to deal with an input stream of facts that are necessary to settle bets? Could some sort of Wiki offshoot crowdsource this?

    • SGCleveland

      There is a cool project called Bitcoin Hivemind (http://bitcoinhivemind.com/) that would function as a prediction market platform, allowing for conditional bets, although not really in the way you suggest. It solves the “oracle” problem where we need a decentralized way to determine what actually occurred to settle any bets. Right now, the project would be implemented as a Bitcoin drivechain (a type of sidechain).

  • http://invariant.org/ Peter Gerdes

    Why predict a blockchain price crash soon? At least if by that you mean a fall in the value of bitcoin relative to the US dollar?

    Indeed, isn’t the one cryptocurrency prediction market that is large, liquid and has sophisticated traders the market predicting future bitcoin value? Or are you suggesting that the current valuation is reasonable in expectation but the majority of the probability is on a decrease in value with a small chance of a huge gain?

    More generally, illegal drugs are a huge business and advances in crypto allow anonymous cryptocurrency transactions making it very difficult for the government to actually shut down cryptocurrencies without accidentally outlawing mainstream financial transactions (what would the law bar? ). I admit there is a danger that future SEC/tax changes will make it more difficult for cryptocurrencies to be used in an investment capacity but I don’t see any reason to believe this isn’t already factored into the price.

  • Anthony Yacobucci

    Why no mention of Hivemind?
    http://bitcoinhivemind.com/

  • http://thescienceofattraction.com Kate Stern

    Typo in this sentence: “It is like putting a smart autist in the C-suite, someone who with lots of valuable info but oblivious to the firm’s political landscape.”

    Suggested change: “…who has lots of valuable info but is oblivious…”

    Best, Kate