Resistance is futile

CNBC Business - December 2009 Issu

Over the last decade, the prediction market industry has grown more slowly than one might have expected given the technology’s unique combination of simplicity and power. The main source of resistance to enterprise prediction markets has been the information and power-sharing that this new approach entails. Those traditionally in control of the collection and distribution of information are often reluctant to let go of their prerogatives.

Yet, the pace of adoption has also been relentless. One has to wonder what is the deep driver to adoption that has been able to effectively counter the natural and powerful resistance to share information and power.

In the latest issue of CNBC BUSINESS magazine, a feature article on NewsFutures provides some answers, beyond the traditional nod to Surowiecki’s “The Wisdom of Crowds” book whose best-seller success is itself a symptom of something deeper and more powerful: a demography-enabled cultural shift:

Servan-Schreiber suggests that it may not be long before participatory technologies become a prerequisite for employees reared on a diet of blogs and wikis. “A whole generation of workers has grown up with the internet and everything it entails,” he says. “It means they expect to be heard and to be part of the conversation all the time, including at work. They expect that people will listen and take them seriously. Prediction markets provide an answer for that yearning.”

…

His message for these companies is that resistance is futile; prediction markets are, literally, the future. “We are in tune with collective intelligence and participatory process; prediction markets can easily involve thousands of people. Our industry is surfing a huge demographic wave and that is what will make us ubiquitous.”

Read the full article online.

Environmental Futures

Following the controversy about hacked climate-science emails that has exploded in the last few days, our friend Robin Hanson has proposed that climate science could benefit from the clarity that prediction markets are uniquely able to bring to hotly disputed issues in science and elsewhere. Nate Silver, the polling wiz of 2008 election fame, agrees and details some of the best reasons to back environmental prediction markets.

This seems a good time, then, to revisit a presentation about “Environmental Futures” that we delivered back in September 2004 at a California Institute of Technology seminar graciously hosted by economist John Ledyard. Robin was there too, and our presentation nods gratefully to his famous paper “Could Gambling Save Science” as the spring board for our ideas about various implementation scenarios for Environmental Futures.

Five years later, is the world finally getting ready for some of these ideas to become reality? We hope you will find this presentation stimulating…

Great words of advice and caution for prediction traders

There are few things quite so thrilling and/or anxiety-inducing as placing a bet. That’s why, for the benefit prediction traders around the world, we recently compiled a score of relevant quotes from some of the greatest minds. Some will inspire you to bold action, some will help you think twice before committing to a particular opinion, all offer a measure of comfort in the face of an unpredictable future.

Enjoy, and be sure to vote for your favorite quote!

Isaac Newton Albert Einstein Muhammad Ali Jim Morrison Yoda John Paul II Charles Darwin Donald Trump Winston Churchill Napoleon Bonaparte John Lennon Leonardo da Vinci Bruce Lee Mahatma Gandhi Benjamin Franklin Ronald Reagan Julius Cesar Abraham Lincoln Sigmund Freud Arnold Schwarzenegger

Obama and the wisdom of the Federal crowd

President Obama and OMB director Peter Orzag launch the SAVE Award idea competition

Americans across the country know that the best ideas often come from workers – not just management. — Barack Obama

Given that “the Crowd” in its infinite wisdom elected him to the coolest job in the World, it’s no surprise that POTUS believes in the wisdom of crowds. But seriously, the White House is putting it’s money where the President’s mouth is by kicking off today the “SAVE Award“, a competition among all Federal workers to produce the best idea for saving Government money and improving bureaucratic efficiency.

While the intention is wonderful – it echoes the wishes of more and more chief executives in the Private Sector to “hear the voices of those on the front lines” – the implementation is, in our view, overly simplistic. Here’s how it works: Everyone submits their ideas through a secure website, then a special committee of high-ranking OMB officials reviews them and submits a short list to the President who handpicks the winning idea.

What’s wrong with this process?

There is no aggregation of the collective wisdom. The crowd is called on only to submit ideas, not to help evaluate them, which is the critical step in the delicate wisdom of crowd recipe. Instead, a bunch of political appointees in the OMB will review all the ideas and decide which will go on the short list that the President will see. Needless to say, we would not dare propose such a simplistic and cumbersome process to our enterprise clients looking to harvest and select innovative ideas from their employees.

Here’s how it should be done: After everyone has proposed their ideas, ask everyone to bet (not vote) on which idea the President will ultimately select – or alternatively, on which ideas will be short-listed by the OMB officials. The crowd’s betting will quickly and efficiently produce a ranking of the best-to-worst ideas, and the result will be less arbitrary than what you can expect from a close-knit group of bureaucrats. Now, it doesn’t mean that the OMB officials cannot have the ultimate say on what ends up on the short list that goes to the Oval Office, but their choice is at least informed by the crowd’s aggregate selection.

We’re glad to see that the Government is looking for ways to save money, but the next time the Administration tries to leverage the wisdom of crowds, it should not be afraid to consult with some collective intelligence specialists first. So as not to add to the Federal Deficit, some of us might even help out for free.

Iowa Electronic Health Market – powered by NewsFutures

IEhM Home Page

With everyone hunting for realistic predictions about the swine flu pandemic, there’s no better place to look than the brand new Iowa Electronic Health Market (IEhM), brought to you by the people who have run the famous Iowa Electronic Political Market for more than 20 years.

The IEhM connects health care experts across the globe to predict the outbreak and spread of various diseases. It currently offers markets on Influenza, Swine Flu, and Syphilis. Each trader is given $100 worth of educational grant to stake on his or her predictions. The operation is funded by grants from government agencies and private foundations.

On both technical and humanistic fronts, the IEhM pushes the envelope. It is certainly the most socially valuable prediction market in existence. NewsFutures is very proud to play a bit part in this great endeavor, having provided the University of Iowa with the prediction market platform with which the IEhM has been developed (with extensive customization by the very talented IEhM development team).

Betting on a better world

Emile is presenting a paper today at the Annual Meeting of the International Studies Association in New York, as part of a panel discussion on “the role of normative and performative predictive ideas” in International Relations, chaired by Ariel Colonomos of CERI-CNRS.

Emile’s paper overviews how prediction markets might benefit forecasting in international relations. You can download it here in pdf.

Prediction Markets 101 (video lecture)

These videos were filmed at an international workshop on “Principles and Mechanisms of Collective Wisdom” organized by the eminent philosopher Jon Elster at the Collège de France in Paris on May 22, 2008.

PART 1: EVIDENCE OF PREDICTION MARKET ACCURACY

PART 2: WHY PREDICTION MARKETS ARE ACCURATE

There followed a challenging Q&A session which is covered in the five next videos (one question and answer each).

Q&A 1: Aren’t political prediction markets just following the polls?

Q&A 2: Why did prediction markets fail to predict the lack of weapons of mass destruction in Irak?

Q&A 3: Would market predictions still be accurate if everyone believed them?

Q&A 4: Is Democracy ready for prediction markets?

Q&A 5: How can trading prices translate into probabilities if individual traders don’t trade accordingly?

In addition to Emile’s lecture on prediction markets, the workshop featured a rich variety of social science perspectives on the issue of collective intelligence, and all these lectures are viewable (in English) in high-quality streaming video. For the audience of this blog, I especially recommend the brilliant lecture by Scott Page on the power of diversity.

Trading data from 2004 and 2008 U.S. presidential elections

We often get requests for data from our political markets, so here they are, free to download. Our way of celebrating this Thanksgiving, and the rebirth of America’s moral leadership. Enjoy!

Click on an image to download the data in Excel format.

2008 election: trading history of the {Democrat to be elected President} contract from February 2007 to election day (November 4, 2008).

2004 election: trading history of the {Bush to be reelected President} contract from mid-July 2003 to election day (November 2, 2004).

Dinner with Paul Krugman

Today’s great news is Paul Krugman‘s Nobel Prize. Although he received the award for his work on international trade and economic geography, it is hard to escape the idea that the Nobel committee may also have been influenced by Krugman’s prescient, relentless and ultimately successful battle against Bush’s plan to privatize Social Security, as well as his repeated warnings that U.S. growth these last few years was an illusion built on top of a soon-to-implode housing boom.

I had the pleasure of meeting this brilliant, generous man two years ago when he came over for dinner in my brother David’s home accompanied by his wonderful wife Robin Wells, also an economist at Princeton. Over a delicious anticancer menu, we discussed health care, politics and the economy. But when talk turned to prediction markets, he was… skeptical. So it’s gratifying to see that, nowadays, he seems to be keeping a rather careful eye on the political markets!

Paul Krugman and wife Robin Wells with the Servan-Schreiber brothers (from left to right: Franklin, Edouard, Emile of NewsFutures, and David), September 2006.

No prediction market, or any other betting pool (including this one from Harvard) nailed the Nobel committee’s choice. This failure is expected, since the decision is made in secret by a closed group, and typically for work done decades ago, out of the scope of current events which might give the rest of us some inkling about the outcome.  Market predictions are known to be pretty useless in such situations, for there’s no information to aggregate: it’s garbage in, garbage out. The same doesn’t apply to, say, TIME’s Person of the Year, which, although decided also in secret by a closed group, very much takes into account recent observable history. Here’s, for instance, NewsFutures’ prediction for Barack Obama to be Person of the Year 2008:

Probability that Barack Obama will be TIME Person of the Year 2008

Wisdom of Crowd Consulting Workshop – NYC 10/27/2008

We’re excited to announce the first Wisdom of Crowds Consulting Workshop, to be held in New York City on October 27th, 2008. It is designed especially for small and medium-size business consultancies who would like to acquire a working knowledge of how to put collective intelligence to work for their clients.

Over the years, we’ve had the chance to partner with some leading consultancies (eg, SAIC, Rand, BAH, Accenture, New England Consulting Group, Market Tools), and a host of smaller ones, to deliver creative wisdom-of-crowds solutions to their clients. Such partnerships are always rewarding and efficient because they combine our expertise in prediction markets with a consultant’s deep knowledge of the client’s business processes.

The workshop will focus practical implementation issues and hands-on experience with various software tools, so that, by the end of the workshop, the participants can be certified as NewsFutures Preferred Consulting Partners.

The one-day program will cover:

• Foundations. Prediction Markets and Wisdom of Crowds 101: principles, mechanisms, evidence, and applications
• Applications. Case studies in strategy, forecasting, innovation, and project management
• Tools. Hands-on experience with various software tools: Prediction Markets, Competitive Forecasting, Idea Pageant, and Impact Matrix
• Practice. Keys to a successful implementation: information, integration, inclusion, interface, and incentives
• Collaboration. Nuts and bolts of collaboration with NewsFutures

Please visit these links for more information, or to register for the workshop.

Bambi Francisco & friends discuss the NewsFutures Exchange on Vator.tv

Bambi Francisco left CNBC’s MarketWatch last year to start Vator.tv, a highly entertaining video-based website dedicated to vetting pitches from innovator. This week, her show took a deep look at NewsFutures’ public prediction exchange (not our enterprise solutions business). Paul Martino, whose company Aggregate Knowledge is about predicting behavioral outcomes based on the aggregate actions of crowds, brought his expert point of view. All told, Bambi, Paul, and Ezra Roizen (a Vator.tv regular) “liked the company.” Check out the show by clicking the video below:

Financial Times writes about Bet2Give

Over the weekend, the Financial Times published a great article about America’s favorite charity-driven prediction market: our very own Bet2Give. Exploring the intersection between philanthropy and online betting requires dedication and persistence, which is another way of saying that the value proposition isn’t immediately obvious to everyone, but the FT’s article highlights an exciting new trend: Some charities are now linking to Bet2Give from their home pages, encouraging their members/donors to use our prediction market as a fund-raising tool. Cool! That’s exactly what we built it for.

There is a discordant note at the end of the article, where respected philanthropy consultant Lucy Bernholz questions whether Bet2Give’s donations aren’t just a gimmick to draw eyeballs. Well, we obviously want to grow traffic, because that translates into impact. But Lucy should realize that 95% of the money that is put into Bet2Give by its traders is eventually given to their chosen non-profits. That’s hardly a gimmick. Few non-profits, in fact, have such low overhead fees.

The article also discusses Longbets.org, another great site well worth visiting.

Red Herring in the Mediterranean

I had the honor this week of being a surprise keynote interviewee at the Red Herring Europe 2008 conference in Malta. Alex Vieux, the Herring’s inspirational publisher, made the impromptu decision to bring me on stage to educate the audience, filled with brilliant young entrepreneurs and venture capitalists, about the concept and virtues of prediction markets. A show of hands, afterwards, indicated that this crowd agreed we were onto something big!

How InterContinental Hotels Group Innovates with NewsFutures

Every business needs to innovate regularly, but betting on new ideas is always risky and the failure rate is high. The New York Times recently ran a detailed article about how companies can better their odds of harnessing and selecting winning new ideas, by turning to prediction markets and the wisdom of crowds.

The InterContinental Hotels case study features NewsFutures’ Idea Pageant, a proprietary prediction market variant that we designed especially with a large-scale innovation process in mind: Whereas regular “trading” markets can be used to rank a few ideas, this approach is terminally cumbersome when dealing with several dozens or hundreds of ideas… The Idea Pageant, on the contrary, is highly scalable, as this case study illustrates.

Here’s the relevant extract from the New York Times article:

At InterContinental Hotels, Zubin Dowlaty, vice president for emerging technologies, decided to create an online market last fall to “harvest and prioritize ideas” from within the hotel’s 1,000-person technology staff. “We wanted to tap the creative class that may not be able to voice their ideas,” Mr. Dowlaty said.

With InterContinental’s prediction market, players were asked to submit ideas anonymously, with a description and the benefit to customers and company. The bettors were given virtual tokens, each receiving 10 green ones to be placed on the best ideas and three red for bad ideas.

There were no limits on the number of times bettors could change their wagers as new ideas came to market, and the market was open for four weeks. The five top ideas (most green tokens), five bottom ideas (most red) and the top five bettors (most accurate, according to market consensus) were listed regularly.

The winners got $500, while second- and third-place finishers received $250 each. The winners, Mr. Dowlaty said, were engineers, analysts and contractors, not managers.

More than 200 people participated, submitting 85 ideas. One person proposed bringing back quarter-operated vibrating beds. “That one got beat down really fast,” Mr. Dowlaty said.

The winning ideas were suggestions to improve searching the company’s Web site to find and book hotel rooms. Two projects have been started as a result of the market, Mr. Dowlaty said.

We were happy to learn later that one of the two projects that got started as a result of the market featured such an innovative way of using Google Maps that Google wrote a case study about it…

Still crazy bullish after all these years

The growth of interest in prediction markets as decision-making tools continues to accelerate around the world. In the last month alone, we’ve been interviewed on Public Radio (WYPR in Baltimore) about the U.S. presidential primaries, presented at the eFinanceLab conference in Frankfurt, fielded questions from an Executive MBA class in Hong Kong, and spoke at length with a reporter from the Economist and another from a financial magazine in Jordan…

Later this month, on March 25th, I’ll be speaking at the Santa Fe Institute‘s Business Network Workshop in Washington D.C., entitled Control in Distributed Networks (Decisions 2.0: Distributed Decision-making). The workshop will examine “the theory and practice of decentralized and distributed decisions in government, non-profit and commercial organizations.” I’ll present case studies of prediction market use in all these contexts.

In these heady days, it’s good to remember that the current widespread interest in enterprise-class applications of prediction markets was not always there. I remember oh so clearly the DIMACS Workshop on Markets as Predictive Devices that was held at Rutgers three years ago, in February 2005. The other speakers were so downbeat about the penetration of prediction markets in the business world that I felt compelled to change the title of NewsFutures’ late-in-the-day presentation from “Corporate prediction markets: Lessons from the real world” to simply “Bullish!“. How right we were to believe and persevere! But at the time, the business value of prediction markets wasn’t the obvious bet it is today: Three years ago, NewsFutures’ only serious competitors in the enterprise space were Carol Gebert’s Incentive Markets, and Charles Polk’s Common Knowledge Markets, both since defunct. We salute them. These days, in contrast, the “wisdom of crowds” niche has gotten pretty crowded, as new entrants around the world have sought to emulate our success and that of a few other pioneers, thereby helping to create a thriving new industry. We’ve come a long way, baby!

eFinanceLab Conference in Frankfurt

This week I’m off to Germany to present at the University of Frankfurt’s eFinanceLab Spring Conference (thursday Feb 21). I’m teaming up with the City University of Hong Kong’s Christian Wagner to talk about how prediction markets can be used to manage risk in the financial sector. I’m also looking forward to a private meeting with professor Bernd Skiera, who has co-authored with Martin Spann some excellent papers on using prediction markets for business forecasting.

Professor Wagner and I will present some results from our recent experiment of using markets to predict trends in Hong Kong property values. Other results will be presented from the prediction markets NewsFutures has operated for various clients such as the World Economic Forum, Eli Lilly and the Texas Department of Transportation. If time permits, we might even discuss Intrade’s US recession market and NewsFutures’ own presidential markets.

The last time I was in Germany was in 2005, when NewsFutures implemented an internal prediction market at Siemens, to forecast sales of its cellular phones. The pilot, although conclusive — the market outperformed official sales forecasts — unfortunately did not survive the sale of the cellular phone division to a Taiwanese company, which soon went bankrupt…

Political prediction markets are good for your health

In his latest best-selling book “The Logic of Life”, undercover economist Tim Harford makes the point that voting is a fool’s errand and that, rationally, everyone should be gambling instead. A recent New York Times review sums up the author’s position as follows:

If you really want to make a difference, buy lottery tickets — your chances of hitting the jackpot are roughly equal to your chances of swinging an election — and devote your winnings to political lobbying.

Lottery tickets? Surely you’re joking, Dr. Harford! The economic rational man or woman should instead be playing the political prediction markets, which offer much better odds of winning than lottery tickets!

But even that misses the point of why people should play real-money political markets, like Intrade or Bet2Give. The main benefit is that, win or lose, it’s likely to help you live longer. You read it here first.

How so, you ask? Well, it is a well known fact that stress weakens the immune system, which in turn makes you more vulnerable to, say, death by cancer. We also know that one of the major causes of stress is the lack of control over your environment. Psychologists call that “learned helplessness“, and its adverse effect on health has been dramatically illustrated by experiments such as the following (from a National Institute of Health report):

In one study rats were given injections of cancer cells following experience with [electric] shocks that were either uncontrollable, controllable, or nonexistent. The rats that received the uncontrollable shock (the learned helplessness rats) were less able to resist the cancer cells, and less than one-third survived. In contrast, some rats experienced the same intensity electric shock but could turn off the shock by pressing a lever. Two-thirds of these rats survived. Other rats were placed in the shock compartments but experienced no shocks. A little more than half of these rats survived.

When it comes to political elections, most people feel quite like those helpless rats receiving uncontrollable shocks. Your individual vote, if you even have one, doesn’t amount to any kind of meaningful control over the outcome, even though this outcome can be extremely aggravating emotionally, financially, and/or physically if the wrong person wins. The resulting stress can reduce your ability to fight diseases, as it does in rats.

But prediction markets finally offer a way to break free of our “learned political helplessness”. Now you can hedge against despair by investing in the election of candidates you dislike. Your preferred candidate wins: rejoice! The other guy wins: at least you’re compensated for the aggravation… Furthermore, you can use your winnings to improve your immediate environment anyway you choose, which beats hoping that your vote will help elect the right guy who will then, perhaps, change your world for the better. Like those rats who get to exercise a measure of control over their shock treatment, your stress level is reduced by your renewed sense of control over political outcomes, and you get to live longer as a result.

In the context of this high-fever election year, it would not be difficult for psychologists to test empirically the health benefits of political prediction trading, or at least it’s effect on politics-induced stress levels. Needless to say that NewsFutures would be happy to collaborate on any such research project which would, if the results are as we expect, provide compelling reason for enshrining political betting as a basic human right, alongside voting.

Their finest hour

Far from failing in New Hampshire, prediction markets performed at their best, providing traders with a much needed reality check.

Hillary Clinton’s upset victory in New Hampshire has encouraged venomous criticism of prediction markets for having overwhelmingly predicted an Obama victory instead. Proof, they say, that all this talk about the superior ability of markets to peer into the future is just so much hype.

This isn’t the first time that an election cycle provides the fuel needed to burn markets at the stake for the heresy of pretending to make useful predictions by harnessing the wisdom of the crowds. We’ve been here before. Remember the Democrats retaking the Senate in 2006, against all odds, or Howard Dean’s unforeseen collapse in 2004 in Iowa?

The classic first line of defense in these cases is to remind people that market “predictions” are really just probabilities, so any one outcome cannot invalidate the approach. The argument is sound and backed up by loads of data. But it would of course be much more convincing if we, as an industry, would remember to show at least as much humility when our market “predictions” appear correct instead. If you’re going to spread the idea that your market called all 50 states in the last U.S. presidential election because each correct outcome was predicted with over 50% chance, then you can’t hide behind probabilities when an 80% prediction comes to naught, as in Obama’s NH collapse.

The second typical line of defense is to admit fallibility, while, paraphrasing Churchill, claiming that “prediction markets are the worst form of forecasting, except for all those other forms that have been tried from time to time”. It is indeed easy to argue that pundits and polls erred even more than markets last Tuesday.

But over here at NewsFutures we don’t think markets have anything to apologize for. We think, rather, that they performed perfectly in New Hampshire, doing exactly what they are designed to do: capturing the consensus opinion in a much finer and dynamic way than all the amorphous media buzz, and, remarkably, giving Clinton a significant chance to win — 20%, give or take a few — even while the pundits and the polls, and some in her own campaign, had already left her for dead.

In fact, it is possible that the people who, on election day, had the best notion that Clinton could still pull it off were those staring at the price of that Obama stock, having to make a decision to buy, hold or sell. Why, they wondered, is it stuck at 80% if it’s such a sure thing? Why are there still people on the other side willing to put down good money on Clinton? What do they know that I don’t? What reports are they reading, what polls are they looking at? Prediction traders were surely among the very few people who, on election day, were confronted with the reality that Obama could still lose, despite what they heard from the pundits and the polls. By virtue of playing the market they were thus better informed than anyone else. For that reason, the NH primary should be chalked up as one of the prediction markets’ finest hours.

Bet2Give on CNBC

Norris Clark, NewsFutures VP for North America, was interviewed today on CNBC by Maria Bartiromo, about our innovative Bet2Give prediction market. Note that the caption on the screen shot below is pretty funny, since Bet2Give is rather more about turning vice into virtue than turning vice into profit… But who cares, it was a really great show! Click on the image below to view the video on the CNBC website.

Off to Hong Kong

I am off to Hong Kong tomorrow to deliver the keynote speech at the 9th Asia Pacific Knowledge Management Conference. My presentation about the implementation and benefits of enterprise prediction markets will be followed by an afternoon workshop.

Update: Picture of myself conducting a prediction market workshop at the City University of Hong Kong. Participants traded predictions about the red hot Hong Kong property market. Don’t be fooled by the bored look of the woman in blue, she actually made the best trades of the day! It was my first trip to Hong Kong and I was particularly moved by the superb statue of Bruce Lee on the Kowloon boardwalk. Long live the dragon!

The Most Heeded Futurists

Nice quote about prediction markets in The Economist’s current special issue titled The World in 2008. In an article about how futurologists have lost their cachet in the new century – too many new technologies colliding to create kaleïdoscopic uncertainty – the author encourages reliance on collective forecasts rather than individual foresight:

“The most heeded futurists these days are not individuals, but prediction markets, where the informed guesswork of many is consolidated into hard probability. Will Osama bin Laden be caught in 2008? Only a 15% chance, said Newsfutures in mid-October 2007…“

Which causes do Bet2Give traders champion?

Updated Jan 11, 2008: When we launched the Bet2Give prediction market last fall, one of the things we were most interested in watching was what kinds of charities traders would choose to give their money to. Now, with over $4,500 raised (ie, funded into traders’ accounts) and over $700 already donated by a score of the more successful traders to their chosen non-profit organizations, we have some preliminary data to look at:

Several observations come to mind:

1) Although most of the gifts have gone to universal favorites like National Public Radio, cancer research, food banks and other aid to the unfortunate, plus a little bit of environment, and a touch of education, close-to-home causes are also well represented: Southern Florida, Western New York, South Dakota …

2) Bet2Give provides a great way to bring lesser-known (“long tail”) charities to the attention of a ready-to-give audience. Did you know about the National Education for Assistance Dog Services (“unleashing the possibilities!”)? Now you do, thanks to those donations from trader/dog-lover Bubba.

3) But what’s perhaps most intriguing, and pregnant with possibilities at the start of this new electoral year, is the emergence of a fund-raising duel between ex-presidents Carter and Reagan. One of the promises of Bet2Give is that it allows you to directly “engage the enemy” from across the political divide: make better predictions, win their money, give it to causes you love but they despise. For some, this may feel better than just winning money, or more painful when you lose!

Enterprise 3.0: new representations, new markets

Later this week, NewsFutures will have another great opportunity to introduce prediction markets into the consciousness of mighty American businessmen and women.

At the invitation of the organizers of the September 2007 DiamondExchange event, CEO Emile Servan-Schreiber will take part in a panel discussion on “technologies to raise your organization’s IQ” led by Chunka Mui, author of Unleashing the Killer App. The exclusive event features an outstanding list of speakers including Marvin Zonis, professor emeritus of the University of Chicago, Dan Bricklin, inventor of VisiCalc, Cory Ondrejka, who leads the team developing Second Life, and Ray Kurtzweil, who needs no introduction a all.

The event, titled “Enterprise 3.0: new representations, new markets”, is organized by the high-powered consulting firm Diamond (Nasdaq: DTPI). It’s nice to see that, having preceded the “Web 2.0” bubble, prediction markets are already moving past it and being associated with the number 3…

The event will be held at the famous Greenbrier, in White Sulfur Springs, WV, whose tag line is “defining luxury since 1778” ! Needless to say, we look forward to this fantastic opportunity to discuss and explore the virtues of prediction markets with this particular crowd.

Introducing Bet2Give : the thrill of betting, the power of giving

This week we released a totally new breed of prediction market, a “mash up” between online betting and online giving.

It’s a simple idea: What if, rather than being reviled as a source of evil, the natural urge to bet on the future could be leveraged to help improve the future? What if you could win more than money?

bet2give, located at http://bet2give.com, is a real-money prediction market where you grow your account with investments in smart predictions about the future, then give your winnings away to non-profit organizations of your choice. Topics cover sports, finance, politics, the war on terror, Iraq, and various current events in between.

Because participants cannot profit financially or materially from their successful bets – all the money won or lost eventually goes to non-profit organizations – bet2give is obviously not a “gambling” venue. The value proposition is something else altogether:

Since you’re betting directly against other people, you are effectively competing to divert their funds to your favorite causes — and they’re trying, of course, to do the same thing unto you. On bet2give, those who are best at predicting the future also get to decide how to improve the future, one donation at a time.

By combining the thrill of betting and the reward of giving, bet2give delivers a unique and powerful emotional experience. It makes betting feel right and it makes giving more fun. There is real synergy there!

At the time of this writing, there’s already more than $1,100 in play, all of which will eventually be donated to various causes chosen by the players when they feel ready to give. And a couple donations too: $20 to the Food Bank of Western New York, and $20 to the Roswell Park Alliance Foundation. It will be interesting to watch what sorts of causes the players will champion.

However, rather than competing with existing channels of online giving, we are betting that bet2give will contribute to enlarge the online fundraising plate for all sorts of worthy causes that people believe in, all the while providing great entertainment and valuable collective predictions backed up by real money.

Again, the bet2give prediction market is located at http://www.bet2give.com.

Will you join us in exploring this totally new territory at the frontier of betting and giving?

UC Riverside’s eLab eXchange : featuring Competitive Forecasting and Idea Pageants

UC Riverside’s Sloan Center for Internet Retailing has just launched their eLab eXchange, a website for gathering collective predictions about marketing in the digital world. The New York Times had a nice write up about it yesterday.

The eLab eXchange features two of NewsFutures knowledge aggregation mechanisms of which there are precious few public examples: Competitive Forecasting and Idea Pageants. So, if you’re curious about what they look and feel like, just take a look at the eLab eXchange…

NewsFutures invented and refined those techniques over the years as simpler/better-fit alternatives to prediction markets for some enterprise problems and contexts. When people don’t have an intuitive feel for “trading”, or have serious time constraints (eg, senior execs), it’s important to provide tools that are easy to use and don’t require any training… Nowadays, we find that most companies we work for naturally choose to use one of these alternative mechanisms for gathering the wisdom of their crowd. These approaches fit the customer’s problem tightly so we don’t have to fit the customer’s problem to a generic prediction market approach.

Competitive forecasting is specialized for extracting range forecasts for business variables, like sales, prices, market share, etc, while Idea Pageants are designed especially for the task of quickly identifying the best new ideas in a very large pool. For instance, the New York Times article cited above mentions two of NewsFutures other clients: Arcelor Mittal is a long-time user of Competitive Forecasting, while InterContinental Hotels Group relies on an Idea Pageant to vet new business ideas.

Importantly, both of these approaches stay true to what NewsFutures believes should be the two pillars of any reality-based knowledge aggregation mechanism: reward people for (a) being right, (b) before others.

We look forward to your questions and comments about these approaches, which you can now get your hands on at UC Riverside’s eLab eXchange.

Demise of a Sarko Killer

She was billed as the only one who could steal this election from Nicolas Sarkozy. The media had dubbed her “the queen of the polls”, so towering was her popularity over her socialist rivals for the party’s nomination. She was strikingly beautiful (for a politician), feminine yet tough, motherly yet authoritative, reassuring yet unafraid to break taboos. She was all at once Delacroix’s Liberty Leading the People, and Joan of Arc. Ségolène Royal had the look and feel of France’s itself. She couldn’t lose. She would crush Sarkozy’s ambition like she had trampled on her own party’s heavyweights, with a smile.

However, through months and months of this media hype, prediction traders remained skeptical. The price of the “President-Royal” contract only briefly caught up with Sarkozy’s just before the official campaign started, then collapsed.

The most interesting “prediction market moment” of the campaign happened just a few days before the final May 6 vote. On May 2nd, Royal and Sarkozy faced off in the first and only televised debate. By this time, Sarkozy was well in the lead, trading at 80% to Royal’s 20%, but any slip-up, any gaffe could have dramatic effects on the voting just four days later…

The candidates were facing each other. Royal, dressed to kill in black and white, never looked more righteous and “presidential”. When she wasn’t speaking, whe was staring down Sarkozy as if to project her implacable will upon the enemy of the people, a technique she had learned from her mentor, François Mitterrand (who had used it successfully against Jacques Chirac). Sarkozy responded by looking subdued, avoiding eye contact with his rival, slightly hunched like a scolded child; A far cry from the hot-tempered, conquering, Napoleonic character everyone had expected to witness. When Royal, in a fit of “righteous anger” accused him of being “immoral”, he kept his head down and barely responded.

After the debate, the pundits were all agreed that Royal had scored some points, and even die-hard Sarkozy fans openly worried that Royal had bested their champion. The next morning, newspapers and radio stations still conveyed the impression that Royal’s performance had probably helped her. However, the trading pattern one could observe on NewsFutures and other prediction markets told a different story altogether. The price of Sarkozy’s contract actually rose a little during the debate and just after, as evidenced in the chart at left. The next morning, this gain held, even as political pundits on the radio stations were still praising Royal’s performance. The disconnect continued until the afternoon, when the results of a poll taken just after the debate showed that it was Sarkozy that had come out on top, confirming the market’s impression.

So, once again, prediction markets performed quite well in an electoral context. This, of course, won’t come as a big surprise to anyone familiar with the field.

Perhaps the more interesting observation in this case is that Ségolène Royal had embraced a “participative” campaign style that very much drew on the “widsom of the crowds”. Her campaign rallies were organised as bottom-up “listening” events designed to extract themes and practical solutions directly from the people themselves. She would ceaselessly repeat that “people are the best experts of what they are living through”. When pressed to give her opinion on a controversial issue, she would often reply that, as President, rather than imposing her views from the top down, she would invite all concerned parties to debate and come up with a proper solution. It is ironic that, in the end, the crowd itself preferred to trust the more authoritarian, decisive, top-down candidate. There is a lesson here about democracy: The crowd demands to be able to choose its leaders, regularly, but then it expects them to lead, not follow.

Results of the Dutch Political Stock Market

Today Queen Beatrix of Holland officially asked prime minister Jan Peter Balkenende to head a newly formed coalition government, and so we closed down the Dutch Political Prediction Market that we had been operating for de Volkskrant. The election actually took place three months ago, on November 22, but the process of negotiating a new three-way governing coalition proved arduous. It’s time to assess the market’s behavior.

The market proposed three sets of contracts to predict the following:

1) Vote shares for thirteen political parties on election day: linear-payoff contracts, 0.01 euro per percentage point. We set maximum payoff caps for these contracts in an attempt to make shorting affordable in the case of small parties. For instance, the SP contract (Socialist Party) had a maximum payoff of 0.15 euro because de Volkskrant’s political experts estimated that SP could not score more than 15% of the vote in any case.

2) Which of eighteen possible coalitions might to form a new government: binary contracts, 1 euro for the winner, 0 for the losers.

3) Who would become the next prime minister: binary contracts, 1 euro for the winner, 0 for the losers.

For each of these groups of contracts, participants could buy a full set (a “basket”) for 1 euro, just as is customary on the IEM. They could also short and cover individual contracts.

Participants could deposit up to 100 euro ($130) into their accounts. In all, about 90,000 euro was deposited into some 1,800 accounts.

Predicting Vote Share

The big surprise of this election – every election has one – turned out to be the big gains registered by the Socialist Party (SP). It scored over 17% of the vote when, a month earlier, everyone expected it to score at most 13%, and it became the third largest party in parliament. No one saw that coming until just before the election: not the experts, not the polls, and not the market. In fact, because the experts were so wrong, we had miscalibrated the maximum payoff cap of the SP contract at 0.15 euro, thus making it incapable of producing a correct prediction in any case. We should have known better than to trust experts!

Because the SP contract was so badly calibrated, we compared the market and the polls on the other three big parties only. At first glance, the quality of the market’s vote share predictions were somewhat disappointing compared to the three main polls: Over the week that preceded the election, the polls, as a group tended to be more accurate than the market, as summarized below:

However, the story changes dramatically if, instead of looking at the predictions just before the election, we consider the predictions several weeks earlier. Four to seven weeks before election day (i.e, throughout October), the polls were much less reliable and the market clearly out-predicted them, individually and as a group.

Now, whether we think this is a good result or a bad result depends on whether we think that it is more useful to predict elections just one week ahead or several weeks ahead…

Predicting the winning coalition

A very interesting thing happened on election day, once it became clear that the two biggest parties, CDA and PvdA, did not win enough seats in parliament to form a coalition together. A governing coalition would need to involve at least three parties, and negotiations promised to be arduous… However, as the chart below shows quite clearly, the market immediately expressed a strong preference for the CDA-PvdA-CU coalition (green curve), even-though the politicians, for their part, rejected that possibility and preferred to start negotiations for another coalition: CDA-PvdA-SP (orange curve). Those negotiations collapsed within a couple of weeks, and the politicians eventually agreed to form the coalition that traders had envisioned on election day.

Predicting the prime minister

In the end, outgoing Prime Minister Jan Peter Balkenende (CDA) kept his job. It is clear from the chart below that he had the market’s preference almost from the beginning and throughout.

For those who want to dig deeper into Dutch politics and the results of this latest election, we recommend the excellent wikipedia entry.

Los Angeles conference on collective intelligence networks

We’re proud to co-sponsor the February 22 Conference on Collective Intelligence Networks, in Los Angeles, together with Cisco, Nasa, and the MIT Center for Collective Intelligence.

NewsFutures’ Norris Clark will present some business world applications of prediction markets, based on our 4 years of experience in this domain.

How time flies! Surowiecki’s book The Wisdom of Crowds was still a year away from hitting the shelves when we got started in this line of business by a call from Eli Lilly… and the kamikaze-style launch of the Policy Analysis Market had not yet put prediction markets on everyone’s radar. Simpler times, those were.

Details of the conference are found at:

http://www.pmcluster.com/LAX.htm

Washington DC conference on prediction markets

Last january, the AEI-Brookings Joint Center, a joint venture between the famous right and left-leaning policy think tanks in Washington DC, held a one day conference about prediction markets. The host was Robert Hahn, the Center’s Executive Director and co-editor of the recent book: Information Markets: A New Way of Making Decisions.

A complete webcast of the event is now available online, along with other conference material. The webcast includes presentations by Justin Wolfers and Robin Hanson, both members of our Scientific Advisory Board, followed by our CEO Emile Servan-Schreiber.

On this occasion, Emile veered from his usual presentation about the business applications of prediction markets to focus instead on NewsFutures’ more publicly visible efforts and partnerships, including:

• The Global Risks Prediction Market that we operate for the World Economic Forum and Thomson Financial, where experts of all stripes try to predict global risks like pandemic avian flu and its impact on the Dow Jones.
• The Global Imbalances Prediction Market, operated in partnership with Roubini Global Economics Monitor, where economists have been trying to assess alternative futures for the global economy.
• The Dutch Political Stock Market, which covered the recent elections in Holland for de Volkskrant. As expected, the market proved more accurate than early polls.
• NewsFutures own US elections markets and how they (favorably) compare with Intrade‘s despite being operated with play money.

The webcast is around 7 hours long… Robin and Justin’s presentations are towards the front and Emile’s is straight in the middle of the webcast.
Enjoy !

Bird Flu may slash DJIA by over 10%

Today, both the Financial Times and Forbes published the predictions of the Global Risks prediction market that NewsFutures built for Thomson Financial and the World Economic Forum. Here are the links to the stories:

Bird Flu may slash DJIA by over 10% – Forbes

Avian Flu and the perception of risk – Financial Times

Here’s an excerpt from the Forbes story:

The predictive market contracts … are currently forecasting the outbreak of bird flu in 22 countries in 2007, which Thomson Financial calculates will result in a fall of in the Dow Jones Industrial Index of 0.4% during the year. However should the spread of bird flu reach 60 countries it is anticipated that this would cause a fall in the Dow of over 10%.

Commenting on the data, Thomas Aubrey, Investment Management Director, Thomson Financial said: This is the first quantitative data that looks at the potential impact of bird flu and provides the global financial services community with invaluable information on this critical non-financial risk. When fed into our sector based risk indicator it will help business leaders develop a greater understanding of the risks facing their businesses and allow them to make more informed decisions to mitigate against this risk.

Every one is welcome to join the Global Risks prediction market. Participation is totally free and you’ll only risk your reputation. Follow this link to the market!