Prediction Markets

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Topic Owners: Matthew, Elisabeth

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Precis

The most high-profile examples of prediction marketsthe Iowa Electronic Markets and Intradestarted by focusing primarily on predicting election outcomes and related political and financial events. Now they have expanded to cultural (Oscars) and technological (X Prize) events as well. The status of the commercial prediction markets is uncertain; for example, Tradesports announced recently that it is closing. And questions remain about the legal status of prediction markets, whether the CTFC will regulate them, and whether they will be taxed.

Rather than focusing on the traditional markets, however, we want to focus on future applications of prediction markets, particularly their possible use by government or by government-industry collaboration. We'd like to explore in particular applications that are likely to be controversial.

The focus will be three cases that we think raise interesting legal and ethical questions.

  • Google's flu-tracking application (where, as Professor Zittrain noted, the predictors aren't even aware that their knowledge is being harvested)

Guests

Justin Wolfers, Economist (confirmed)

Hal Varian, Google (possibly, on videoconference)

Concrete Questions

  • Which of these applications are most likely and desirable?
  • Should the government be involved in administering prediction markets at all? Should it regulate them?
  • What ethical concerns do we have about prediction markets of the future, and how might we address them? Can design of the markets help mitigate concerns? Are some more fundamental?

Tech Tweak/Experiment

Everyone will create their own prediction market contract via intrade.net. Once you set up an account there, you can then create you own contract at http://www.intrade.net/market/create/start.faces. Your contract can be about anything you like (doesn't have to be legal), but it should conclude before our class date, April 27, 2009. The idea is (1) for everyone to get a feel for how prediction markets operate; (2) to see what kinds of contracts get enough volume to be successful and what kinds don't; (3) to see how accurate the predictions are, how they change over time, etc.

Once you've signed up and created a contract -- please do so by Friday, March 20 -- you can invite other people in the class to bet on your contract to give it some initial starting volume. (Intrade.net gives everyone $10k in play money upon signing up, so obviously if people want to bet on the wider world's contracts, that's great too). Everyone should list the contracts they've created below to facilitate class participation on intrade (and so that we can generate a variety of different kinds of contracts). At the actual class session on April 27, everyone should come in prepared to briefly discuss what happened with their contract (feel free to create more than one).

Readings

  • Background
    • A brief general overview of prediction markets, Justin Wolfers & Eric Zitzewitz, Prediction Markets, 18 Journal of Economic Perspectives 107 (2004).
    • Chapter 10 of Michael Abramowicz's book Predictocracy
  • Google Flu Tracking Program
  • Crime
    • Professors Wolfers, Henderson, Zitzewitz's paper proposing the application of prediction markets to crime

Optional Readings

  • Professor Sunstein's Infotopia
  • Cass R. Sunstein, Group Judgments: Statistical Means, Deliberation, and Information Markets, 80 N.Y.U. L. Rev. 962 (2005)

Class-Constructed Markets

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