Category Archives: Prediction Markets

Reinventing Idea Futures

From the April Physics World:

A key problem, suggests mathematical physicist Eric Weinstein of the Natron Group, a hedge fund in New York, is that it is too easy for scientists in the “establishment” of any field to cut down new ideas, and to do so without really putting anything at risk, thereby leading to a culture that is systematically biased toward caution. …

Weinstein suggests another idea — that we should borrow some ideas from financial engineering and make scientists back up their criticisms by taking real financial risks. You think that some new theory is utterly worthless and deserving of ridicule? In the world Weinstein envisions, you could not trash the research in an anonymous review, but would buy some sort of option giving you a financial stake in its scientific future, an instrument that would pay off if, as you expect, the work slides noiselessly into obscurity. The money would come from the theory’s proponents, who would similarly benefit if it pans out into the next big thing.

Weinstein’s point is that markets, in theory at least, work efficiently and — putting the current financial meltdown to one side — lead to the accurate valuation of products. They exploit the “wisdom of crowds”, as a popular book of the same title recently put it. Take the famous electronic prediction markets at the University of Iowa, which pool the views of thousands of diverse individuals and consistently seem to give better predictions than any expert. …

“It would be more efficient,” he says, “if the maverick could demand of the critic, if my theory is so obviously wrong, why don’t you quantify that by writing me an options contract based on future citations in the top 20 leading journals secured by your home, furniture, holiday home and pension?”

This article makes it seem like Eric reinvented idea futures.  Except that Eric and I discussed the concept last May, when we had two phone conversations and exchanged seven emails.

In 1996, a Russ Ray published a paper in Futures Research Quarterly that was basically cut and paste from my Idea Futures paper.  Imitation is the sincerest form of flattery, right?  Hat tip to Jef Allbright.

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Reply to Moldbug

A Mencius Moldbug has written a confused and rambling 7400 word critique of futarchy. But since Mencius seems to have passion and potential, let me try to communicate.  Most readers may prefer to skip this post; it will get tedious.

Prediction markets are a fine idea, whereas decision markets are… well… retarded. … Almost every conceivable application of a decision market … does not produce accurate predictions.

So if PM good, DM bad, your complaints should focus on features that distinguish decision and prediction markets, right?

For a market to produce accurate predictions, there must be genuine experts in the market, and they must be substantially better-funded than the morons.

OK, except that morons may largely cancel each other, in which case you don't need as many non-morons.  But this issue applies equally to prediction and decision markets, doesn't it?

If no one has ever seen the Emperor of China's nose, can a prediction market predict its length? … The worst case is that in which nobody has any way of actually calculating the prediction, but no one in the market is sure that this is the case. Your market signal will look exactly like that of an accurate prediction market, but predict nothing at all.

You can ask for a full probability distribution.  If speculators know they don't know anything, then they will give you a broad distribution that expresses a lot of uncertainty.  This is them telling you they don't know much.  In your nose example, they may just give you the distribution over nose sizes for elite Chinese.  And how is this issue different for prediction vs. decision markets?

Continue reading "Reply to Moldbug" »

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Meta Institutions

Institutions are stable social contexts which make and coordinate actions.  Examples include elections, agencies, courts, clubs, debates, peer review, malls, games, media, etc.  It is by now an economic truism that institutions matter a lot.  Good institutions can induce good choices and info sharing, while bad institutions do the opposite.  

Rather than advise particular choices, economists prefer to advise on general policies, that apply to many choices.  We prefer even more to advise on choice of institutions, since an institutional choice can influence a great many policies.  Following this meta line of reasoning, we should prefer even more to advise on meta-institutions, i.e., institutions that structure our choices of institutions. 

We allow most of our familiar institutions to at least influence our institutional choices.  But no doubt we use some more often in that role, and some are better suited to that role.  While I'm excited that decision markets can help advise organization decisions, I'm most excited about their potential as meta-institutions, advising us on key policy and institutional choices.  Of course we'll have to demonstrate their effectiveness more on small issues before folks will rely on them for big issues.

Some basic questions:

  1. What institutions are especially good as meta-institutions?
  2. What institutions should we use to evaluate meta-institutions?
  3. What institutions are biased to prefer other institutions like themselves?
  4. How often do different institutions agree on particular institutional choices?
  5. What institutions can sensibly say if to rely on them as meta-institutions?
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Wisdom of Rhode

Paul Rhode's "skeptical perspective" on corporate prediction markets:

In many ways, tapping of the wisdom of crowds within the firm is intended to overcome the information barriers created by the bureaucracy.  It is obvious that the upper management might want better access to selected information available down the organizational ladder, to stop having to listen to the self-serving lies of middle management.   But it seems to me, the individuals in an organization derive their power from the information under their exclusive control and will not easily give up this monopoly position.  What models we economists have about hierarchies largely concern controlling information flows, both up and down the organization.  This includes both having the higher-ups monopolize the firms’ secrets and strategies and preventing them from being overwhelmed by the day-to-day minutia.

With internal prediction markets, key questions include who will set the agenda, who decides what questions will be answered and how? It seems authority matters in whether this is done in a top-down or bottom-up manner. If the question is what is the best forecast for demand growth, will this deadline be met, or how will the product rank in quality tests, it is clear that upper management, the “deciders,” would be happy to learn from the collective wisdom of employees in contact with customers or doing the design work.  If the questions posed address how long before the company president is fired, whether this product is found defective and has to be recalled, or when the mass layoffs will begin, then upper management will be unhappy.

Prediction markets provide more information, but they do so in a public way.  What prevents competitors from spying, from gaining access to company secrets?  Besides making private information common knowledge, prediction markets undermined the mystique, the information monopoly of those in charge.

I agree completely and have said similar things many times.  So why am I called a "hyperbolic" optimist?  Today I speak at a corporate prediction markets summit in NYC.

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Score Your Beliefs

A new Games and Economic Behavior paper (ungated here) shows that just asking folks to estimate the chances of events, where they expect to be scored later for accuracy, induces more accurate beliefs about those events, but that what folks believe and say can still consistently diverge:

Belief elicitation in game experiments may be problematic if it changes game play. We experimentally verify that belief elicitation can alter paths of play in a two-player repeated asymmetric matching pennies game. Importantly, this effect occurs only during early periods and only for players with strongly asymmetric payoffs, consistent with a cognitive/affective effect on priors that may serve as a substitute for experience. These effects occur with a common scoring rule elicitation procedure, but not with simpler (unmotivated) statements of expected choices of opponents. Scoring rule belief elicitation improves the goodness of fit of structural models of belief learning, and prior beliefs implied by such models are both stronger and more realistic when beliefs are elicited than when they are not. We also find that “inferred beliefs” (beliefs estimated from past observed actions of opponents) can predict observed actions better than the “stated beliefs” from scoring rule belief elicitation.

Yet more evidence that we should try to get into the habit of collecting track records about our beliefs.

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Who Loves Truth Most?

Who loves cars most?  Most people like cars, but the folks most vocal in their enthusiasm for cars are car sellers; they pay millions for ads gushing about how much their engineers love designing cars, their factory workers love building them, etc.  The next most vocal are probably car collectors, tinkerers, and racers; they'll bend your ear off about their car hobby.  Also vocal are folks visibly concerned that the poor don't have enough cars. 

But if you want to find the folks who most love cars for their main purpose, getting folks around in their daily lives, you'll have to filter out the sellers, hobbyists, and do-gooders to find ordinary people who just love their cars.  For the most part, car companies love to sell cars to make cash, car hobbyists love to use cars to show off their personal abilities, and do-gooders use cars to show off their compassion.  By comparison, those who just love to drive from point A to B don't shout much.

Truth loving is similar.  Most folks say they prefer truth, but the folks most vocal about loving "truth" are usually selling something.  For preachers, demagogues, and salesmen of all sorts, the wilder their story, the more they go on about how they love truth.  The next most vocal in their enthusiasm for truth are those who, like car hobbyists, use public demonstrations of truth-finding to show off personal abilities.  Academics, gamers, poker players, and amateur intellectuals of all sorts are proud of the fact that their efforts reveal truth, and they make sure you notice their proficiencies. And do-gooders earnestly talk about the importance of everyone understanding the truth of the uninsured, the illiterate, etc.

Continue reading "Who Loves Truth Most?" »

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Wrong Tomorrow

Wrong Tomorrow by Maciej Cegłowski is a very simple site for listing pundit predictions and tracking them [FAQ].  It doesn't come with prices and active betting… but a simple registry of this kind can scale much faster than a market, and right now we're in a situation where no one is bothering to track pundit predictions or report on pundit track records.  Predictions are produced as simple entertainment or as simple political theater, without the slightest fear of accountability.

This site is missing some features, but it looks to me like a starting attempt at what's needed – a Wikipedia-like, user-contributed, low-barrier-to-entry database of all pundit predictions, past and present.

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Missing Alliances

Eliezer Yudkowsky writes:

It is a non-so-hidden agenda of this site, Less Wrong, that there are many causes which benefit from the spread of rationality – because it takes a little more rationality than usual to see their case, as a supporter, or even just a supportive bystander.  Not just the obvious causes like atheism, but things like marijuana legalization … If the supporters of other causes are enlightened enough to think similarly…

Then all the causes which benefit from spreading rationality, can, perhaps, have something in the way of standardized material to which to point their supporters – a common task, centralized to save effort – and think of themselves as spreading a little rationality on the side. … Atheism has very little to do directly with marijuana legalization, but if both atheists and anti-Prohibitionists are willing to step back a bit and say a bit about the general, abstract principle of confronting a discomforting truth that interferes with a fine righteous tirade, then both atheism and marijuana legalization pick up some of the benefit from both efforts.

So is there a workable natural alliance between more-rational-than-average folks?  Consider two related but unpopular alliances:

Extremists – People who hold extreme views seem to have a common cause in persuading others that central/conventional views are less reliable than they may seem; they agree outsiders deserve more chances to prove themselves without being dismissed just for holding extreme views.

Folks Who Think They'd Win Bets – People who think their views will eventually be vindicated seem to have a common cause in promoting the creation of, use of, and deference to betting markets; they expect market odds to discount opponents who deep down know their arguments are weak.

My experience is that such alliance members are seen as low status, making others reluctant to join them.  Since on average crazy folks tend to be more attracted to extreme views than sane folks, most kinds of extremists try to distance themselves from other kinds.  And since on average lowbrow folks find open betting markets and track records more engaging, most elite-aspiring intellectuals avoid open betting markets and forecast track records.  I conclude that the proposed alliance of rational folks will only fly if can find a way for its members to be seen as high, not low, status.

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Yes, Tax Lax Ideas

Politicians who really wanted to show they would keep their campaign promises would post bonds, judged by neutral third parties, forfeit if they broke their promises.  Similarly, pundits who really wanted to show they believed their punditry would offer to bet on their claims.  Pundit Tyler Cowen says this would be too much bother:

Bryan Caplan believes that scholars should be ashamed if they do not publicly bet their views.  In contrast I fear this requirement would become a tax upon ideas. How would you feel about an obligation (if only a moral one) for scholars and commentators to publicly reveal the content of their investment portfolios?  Those portfolios are their real bets.  Yet I still favor the privacy norm and I should note that Bryan never has (nor need he) revealed his portfolio to others at GMU, much less to the broader public.

Let's say that I, as a prolific blogger, express opinions on hundreds of economic policy topics, often involving either explicit or implicit predictions.  Then say that hundreds of people wish to bet with me.  Can I not simply turn them all down as a matter of policy and practicality?

If you're wondering, I practice "buy and hold and diversify," with no surprises in the portfolio and a conservative ratio of equity purchases.  But those investment decisions don't necessarily reflect my views on any given day.  I think it is intellectually legitimate (though perhaps not always prudent) to engage in mental accounting and separate those two spheres of my life.  I change my mind lots of times, on many economic issues, but does that mean I have to become an active trader?  I hope not and I'm not going to.

Yes, transaction costs keep investments from closely matching beliefs. For example, my investments have long been mainly in my house, family, job skills, and relationships; I don't have much money for more.  But that wouldn't prevent me, or Tyler, from having hundreds of small token bets on our public claims, at least the claims that lend themselves to bets.  Yes, a bit of a bother, but well worth it if our readers actually cared that we believe what we say, or wanted to track our accuracy.

Yes, most readers and voters probably don't care much about pundit and politician accuracy and sincerity; they mostly want to affiliate with a stately staccato stream of statusful statements.  Slowing this down to post bonds, make bets, or even just think carefully, would just not be worth the tradeoff.  But I'll join most of Tyler's commenters in saying that some of us do care about accuracy and sincerity.  I'm open to bets on my claims, even if that slows me down.

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The Longshot Bias

I should have reported on this Snowberg-Wolfers paper long ago:

[A] longstanding empirical regularity is that betting odds provide biased estimates of the probability of a horse winning|longshots are overbet, while favorites are underbet. Neoclassical explanations focus on rational gamblers who overbet longshots due to risk-love. The competing behavioral explanations emphasize the role of misperceptions of probabilities. We provide novel empirical tests that can discriminate between these competing theories … Using a new, large-scale dataset ideally suited to implement these tests we find evidence in favor of the view that misperceptions of probability drive the favorite-longshot bias, as suggested by Prospect Theory. Along the way we provide more robust evidence on the favorite-longshot bias, falsifying the conventional wisdom that the bias is large enough to yield profit opportunities (it isn't) and that it becomes more severe in the last race (it doesn't).

Of course we implicitly underestimate odds for events of which we aren't explicitly aware.  So it is not so much that we overestimate odds for low probability events, as that we overestimate odds for low probability events to which betting markets give unusual attentionCombinatorial betting markets should greatly reduce this problem, as every high probability event is then composed of many low probability events, all of which are available for betting.

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