Prediction Markets

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.

• Crime rate predictions, a la this proposal

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

• the failed DARPA terrorist futures market

Guests

Justin Wolfers, Economist (confirmed)

Hal Varian, Google (possibly, on videoconference)

The Big Think team might be able help secure some of these folks -- hit me up at peter@bigthink.com if you'd like some assistance making contact. PeterH 07:11, 25 December 2008 (UTC)

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 the second class on February 9 -- 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 can list the contracts they've created below to facilitate class participation. 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

• General
  • 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
  • The New York Times's writeup

• Crime
  • Professors Wolfers, Henderson, Zitzewitz's paper proposing the application of prediction markets to crime

• DARPA
  • Senator Daschle's criticisms of the DARPA terrorism futures markets, http://www.fas.org/sgp/congress/2003/s072903.html, and Senator Dorgan's, http://ftp.fas.org/sgp/congress/2003/s072803.html
  • A brief paper describing the failed DARPA terrorism futures market, by a Professor at the Naval Postgraduate School. Robert Looney, DARPA’s Policy Analysis Market for Intelligence: Outside the Box or Off the Wall?, STRATEGIC INSIGHTS (2003).
  • A few newspaper articles describing the uproar over the DARPA program and its quick cancellation

Optional Readings

• Professor Sunstein's Infotopia

• Robin Hanson's Futarchy proposal

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

• Paper on the application of prediction markets to corporate governance

Past Discussion/Ideas

One obvious thought is to see whether the class can play around with using prediction markets, though more thought needed on what we'd want to predict. Incentives for accurate predictions like t-shirts?

Will Harvard give us some small amount of money to invest for the semester? We could have an auction to determine whose investment ideas we use. The incentives would work so that you would only bid more to control the investment if you actually thought your investment idea would generate more net return to you (minus what you spent on the auction), despite it being divided up among the class.

Looks great. Harvard will not give us money to gamble (!), but some form of experiment would be fun, and maybe we can design one that draws in audiences outside the class. Might be good to think about prediction markets of the future -- perhaps ones where the ants making the predictions aren't even aware that they're doing so. (Consider Google's recent cooperation with the US Centers for Disease Control to associate a spike in searches for flu medicine with a prediction that a particular region will experience a health emergency.) JZ 16:28, 15 December 2008 (UTC)