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| - | + | '''Welcome to the Prediction Markets wiki of the Graduate School of Management, University of Haifa''' | |
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| + | This wiki was initiated by Daphne Raban and Dorit Geifman as a collaborative knowledge repository on the topic of Prediction Markets. We intend to update this wiki with resources and findings as we pursue the topic. True to our belief in the value of collaboration we encourage you to contribute. | ||
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| + | To open an editing account please contact [mailto:dorit.geifman@gmail.com Dorit] | ||
Consult the [http://meta.wikimedia.org/wiki/Help:Contents User's Guide] for information on using the wiki software. | Consult the [http://meta.wikimedia.org/wiki/Help:Contents User's Guide] for information on using the wiki software. | ||
| - | == | + | == Introduction == |
| - | * [http:// | + | |
| - | + | == What are Prediction Markets used for? == | |
| - | * [ | + | Prediction Markets are used to reveal, and aggregate information and opinion from dispersed audiences by utilizing the mechanism of financial markets. Implementations of Prediction Markets address the following goals: |
| + | * '''[[:Category:Aggregate information|Aggregate information]]''' - collect factual, unknown information which is segmented and / or scattered | ||
| + | * '''[[:Category:Predict|Predict]]''' uncertain future events | ||
| + | * '''[[:Category:Elicit opinion|Elicit opinion]]''' - obtain and evaluate preferences or new ideas from a large and distributed group of people | ||
| + | Prediction Markets cover a wide range of topics. These may be in the areas of '''[[:Category:Current or recreation events|Current or recreation events]]''', '''[[:Category:Business topics|Business topics]]''', '''[[:Category:Policy issues|Policy issues]]''', '''[[:Category:Synthetic events|Synthetic events]]''' etc. | ||
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| + | == Prediction Markets in Context == | ||
| + | We can trace the origins of the Prediction Markets concept to the works of [http://en.wikipedia.org/wiki/Friedrich_Hayek Friedrich Hayek], the winner of the Nobel Prize in Economics, and a social and political philosopher. Hayek claimed that the price mechanism serves to share and synchronize local and personal knowledge, allowing society's members to achieve diverse, complicated ends through a principle of spontaneous self-organization. | ||
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| + | == Online Markets and Platforms == | ||
| + | The [http://en.wikipedia.org/wiki/Prediction_market Prediction Markets entry] in Wikipedia provides an extensive list of operating markets, categorized according real-money and play-money markets. It also lists a wide range of proprietary as well as open-source prediction markets software. The intention in this section is to mention only markets and platforms that can contribute in some way to deeper understanding of prediction markets and assist in the teaching and research activity. | ||
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| + | === Iowa Electronic Market (IEM)=== | ||
| + | [http://www.biz.uiowa.edu/iem/ Iowa Electronic Market (IEM)] is a real-money, non-profit market, operated by the Henry B. Tippie College of Business at the University of Iowa as part of its research and teaching mission. IEM was first opened on 1988 and is since known and widely cited mainly for its political prediction markets. Some of its markets are open to the public while others are available for classroom traders only. For the latter, the IEM web-site also includes [http://www.biz.uiowa.edu/iem/classroom/ course modules, sample assignments] and reference to many [http://www.biz.uiowa.edu/iem/archive/references.html research papers]. True to its research mission, IEM has opened its [http://www.biz.uiowa.edu/iem/archive/historicaldata.cfm historical trading data] for research activity and consequently it is widely cited in academic papers as well as by the media. | ||
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| + | === Zocalo - an open-source prediction markets platform === | ||
| + | [http://zocalo.sourceforge.net/ Zocalo] is an open-source toolkit for building prediction markets. The project is lead by [http://mydruthers.com/ Chris Hibbert] and supported by [http://www.commerce.net/ CommerceNet]. The software was first released on July 2006 on SourceForge.net and there have been ongoing updates since. Hibbert's short-term plan is to support experimental markets in economic labs, at a later stage support internal pilot markets to businesses and for the long-term deploy public markets with partners. Currently it is in used by George Manson University (GMU) to experiment whether manipulators affect the market price. Hibbert is looking for collaboration and the software can be [http://sourceforge.net/projects/zocalo/ downloaded] from the Zocalo project page at SourceForge.net. | ||
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| + | == How does it work? == | ||
| + | Prediction Markets differ in their internal design, operational model and structure of assets. In this section we will provide an overview and references for more detailed information. | ||
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| + | === Prediction Market Architectures === | ||
| + | The different nature of Prediction Markets, mainly its special attributes stemming from it being used as an information aggregation mechanism, drove researchers to reconsider the traditional market architectures and propose some new market models. The main issues that have been addressed are market liquidity and number of traders, its quality as an information aggregation platform and the risk taken by market institutions. | ||
| + | This section will first outline the basic market models and then describe the architectures that have been proposed and are used for Prediction Markets. For each model, data or platforms suitable for research purposes will be mentioned. | ||
| + | |||
| + | ==== Market Models ==== | ||
| + | Prediction Markets implement various exchange models and pricing mechanism: | ||
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| + | * '''[[:Category:Continuous Double Auction (CDA)|Continuous Double Auction (CDA)]]''' where the market mechanism continuously matches orders to buy an asset (bid) with orders to sell an asset (ask). | ||
| + | * '''[[:Category:Market Scoring Rules(MSR)|Market Scoring Rules (MSR)]]''' – traders can continuously update their score rating i.e. the estimates of the probabilities of the event, and the underlying pricing function calculates the new probabilities (price). The model implements an automatic market maker. | ||
| + | * '''[[:Category:Dynamic Pari-Mutuel (DPM)|Dynamic Pari-Mutuel (DPM)]]''' - a hybrid between the Pari-Mutual model, where all bets are placed in a pool which is later divided between the winners, and the Continuous Double Auction models | ||
| + | * '''Wagering markets''' | ||
| + | This model is typically found in sports and horse betting institutions. In this case the bookmaker sets the odds according to some expert opinion. The bookmaker may change the odds according to the level of betting, however the odds or the price are fixed at the time of the bet. The bookmaker profits by offering different odds for the two(or more if applicable)sides of the bet. | ||
| + | * '''Scoring rules''' | ||
| + | Scoring rules are used in the case(the simple scenario)where the outcome of an event has 'n' states and the sum of their probability to occur is 1. The trader is asked to report her opinion on the probability distribution between the states. Once the true state is known, the trader gets a reward which is proportionate to the probably s/he indicated for that event. This requires the market to have a patron that agrees to pay the reward. | ||
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| + | === Operation Models === | ||
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| + | ==== The Iowa Electronic Markets model ==== | ||
| + | The Iowa Electronic Markets (IEM) is operated by the University of Iowa, the Henry B. Tippie College of Business, as part of its research an teaching mission. Consequently the exchange is run as a non-profit operation. | ||
| + | The contracts are issued for trading by means of '''unit portfolios''', which consist of one of each of the contracts as defined in the market prospectus. The price of the unit portfolio is the guaranteed aggregate liquidation value of the its contracts. At any point in time the trader can buy or sell the IEM exchange these unit portfolios through a fixed price bundle order. Once a trader buys the unit portfolio the contacts are put into circulation and executed upon through the different market actions. | ||
| + | The market actions that are available to the trader are: | ||
| + | * '''Fixed price bundle orders''' – a request to buy or sell the IEM exchange a set of contacts which form a unit portfolio at a fixed price that is the guaranteed aggregate liquidation value of the assets within the unit portfolio. | ||
| + | * '''Market price bundles orders''' – a request to simultaneously buy or sell a set of contracts which form a unit portfolio at their respective market prices | ||
| + | * '''Limit orders''' - a request to buy or sell a contract at a specified price for a specified period of time | ||
| + | * '''Withdrawing of outstanding orders''' | ||
| + | * '''Market orders''' – requests to buy or sell contracts at the current ask and bid prices | ||
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| + | === Contract payout structures === | ||
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| + | ==== Linear ==== | ||
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| + | ==== Winner-takes-all ==== | ||
| + | |||
| + | === Incentive Models === | ||
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| + | == Is it Reliable and Accurate? == | ||
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| + | == Classification of Prediction Markets == | ||
| + | A link to the main classification page [[Information Markets - Classification]]. | ||
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| + | == Corporate Prediction Markets == | ||
| + | We are now starting to witness the proliferation of Information Markets into the corporate decision-making environment. One of the pioneering organizations to use Prediction Market as an internal decision-support tool is Hewlett Packard, which is using it as a sales forecasting tool. Intel too is using Information Markets for managing products forecast and production plans. There is evidence that many other organizations like Google, Eli Lilly and Microsoft are jumping into the water, but most of this activity is still in an experimental stage. Organizations are still trying to figure out the kind of incentives to be used, how to make sure that established hierarchies are not threatened and how to maintain a cost effective process etc. | ||
| + | === Examples === | ||
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| + | ==== Google ==== | ||
| + | As posted in the [http://googleblog.blogspot.com/2005/09/putting-crowd-wisdom-to-work.html Google official blog] on September 2005, a prediction market was set up inside the company with the intention of forecasting product launch dates and other things of strategic importance to Google. More than a thousand Google employees bid on 146 events in 43 subjects. This was developed as one of the projects under Google's policy of employees spending 20% of their time developing whatever new ideas they find interesting. Recently the results 2.5 years running the experiment were published [http://bocowgill.com/GooglePredictionMarketPaper.pdf Cowgill, Wolfers, & Zitzewitz, 2008]. It is interesting to note that the experiment did not only provide the outcome of the future events that were traded, but also an insight in the organization's internal information flows. | ||
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| + | == Implementations of Prediction Markets == | ||
| + | * General Electric's [[Imagination Markets]] | ||
| + | * [[Hubdub]] | ||
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| + | == Resources == | ||
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| + | === Academic Articles === | ||
| + | * [http://siepr.stanford.edu/papers/pdf/03-25.pdf Wolfers,J. and E. Zitzewitz (2004). "Prediction Markets." SIEPR Discussion Paper No. 03-25] is a comprehensive paper on Prediction Markets that addresses various perspectives of the topic | ||
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| + | === Books === | ||
| + | * '''Surowiecki, J. (2005)''' - ''The wisdom of crowds: why the many are smarter than the few''. This book is starter into the world of the wisdom of the crowd and specifically Prediction Markets. | ||
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| + | === Wiki, Blogs & Bookmarks === | ||
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| + | * [http://del.icio.us/doritgsb/prediction-markets Dorit's del.icio.us Prediction Markets bookmarks] - maintains a list of related bookmarks, tagged with sub-categories. | ||
| + | * [http://en.wikipedia.org/wiki/Prediction_market Wikipedia on Prediction Markets] - has good articles and references. It is being updated on a frequent basis. | ||
| + | * [http://www.midasoracle.org/ Midas Oracle] - the most extensive information source on Prediction Markets. | ||
| + | * [http://www.forecastingprinciples.com/PM/ Special Interest Group on Prediction Markets] - a good source for various types of resources in this domain. | ||
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| + | === Prediction Markets in the media === | ||
| + | * [http://www.time.com/time/magazine/article/0,9171,660965,00.html Time Magazine – The end of Management?] - dated mid 2004, it is one of the first articles that brings the concept of Corporate Prediction Markets to the public awareness and lists some of the pioneers in the area. | ||
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| + | === Research Data === | ||
| + | Some public exchanges open their data for academic exchange | ||
| + | * In [http://www.biz.uiowa.edu/iem/archive/index.html Iowa Electronic Markets (IEM)] you can find historical data and research papers. | ||
| + | * In [http://www.tradesports.com/data/ TradeSports] you can gain access to historical data (2004-2006), mostly sports, some political and entertainment. | ||
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| + | == Glossary == | ||
| + | * '''Ask (הוראת מכירה)''' - an order to sell a specified number of contracts at a specified price over a specified number of days | ||
| + | * '''Bid (הוראת קניה)''' - an order to buy a specified number of contracts at a specified price over a specified number of days | ||
| + | * '''Contract (חוזה)''' - the financial instrument being traded in the markets. It is the trading unit and is uniquely defined by a name, ''fundamental'' and ''expiration date''. | ||
| + | * '''Exchange (בורסה)''' - a set of ''markets''. | ||
| + | * '''Expiration date (תאריך פקיעה)''' – a pre-specified date, or a date of an event, at which the ''liquidation value'' of the ''contract'' is calculated. | ||
| + | * '''Fundamental''' – a set of statistics which can objectively be measured | ||
| + | * '''Liquidation value (שווי מימוש)''' – the value of the ''contract'' calculated based on the value of the ''fundamental'' on the ''expiration date''. | ||
| + | * '''Market (שוק)''' - a set of trading rules, traders, information and ''portfolios'' with a common area of interest. | ||
| + | * '''Portfolio (תיק נכסים)''' - a set of ''contracts'' based on the same ''fundamental'' and ''expiration date''. | ||
