Monthly Archives: February 2008

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…

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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!

Doctor recommendedBut 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.

Mission AccomplishedWhen 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.

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