Monthly Archives: February 2007

Results of the Dutch Political Stock Market

Dutch GovernmentToday 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:

Predictions last week before election

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.

Predictions several weeks before election

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.

Coalition contracts

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.

Premier contracts

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

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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

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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.

AEI Brookings Joint Center logoA 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 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 !

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