Social wisdom: prediction markets

Putting your money where your mouth is

People make predictions all the time

. . . about other peoples' reactions

. . . . . . ability to predict the effect of your action on others is useful

. . . . . . you need a theory of mind

. . . . . . you're in a game theory scenario

. . . . . . data shows population density could be the major cause of human brain size

Human brain. Credits: Patrick J. Lynch, medical illustrator; C. Carl Jaffe, MD, cardiologist. Http://creativecommons.org/licenses/by/2.5/

Chimpanzee brain. Credits: Gaetan Lee; tilt corrected by Kaldari. Http://creativecommons.org/licenses/by/2.0/

. . . . . . . . . this is the social competition theory of human brain genesis (ref.: Bailey & Geary, Hominid Brain Evolution: Testing Climatic, Ecological, and Social Competition Models Human Nature, vol. 20, no. 1, Mar. 2009, pp. 67-79. )http://www.springerlink.com/content/13t74x04552g5148/fulltext.html

. . . . . . so the need to predict may explain why we're human!

. . . about the weather

Credits: Don Amaro from Madeira Islands, Portugal, upload by Herrick 17:17, 4 December 2007 (UTC). Http://creativecommons.org/licenses/by/2.0/

Waterspout. Credits: http://www.photolib.noaa.gov/bigs/wea00308.jpg. 1969 September 10. Photographer: Dr. Joseph Golden, NOAA. Public domain.

. . . . . . The National Weather Service is a large and technical gov't agency devoted to prediction using large computers, etc.

. . . . . . It's not perfect but it's much better than nothing

. . . . . . Group wisdom can be used, e.g. in bet-oriented ways

. . . . . . Will the average global temperature for 2009 be among the highest 5 years recorded?

. . . . . . . . . for about 50 "points" ($5) you can bet it will (or won't) and win $10 (or lose)

Credits: intrade.com, http://data.intrade.com/graphing/jsp/closingPricesForm.jsp?contractId=672070&tradeURL=https://www.intrade.com

. . . about sports

Tim Henman serving at Wimbledon, 2005. Credits: Photo by Spiralz; license: http://creativecommons.org/licenses/by/2.0/

. . . . . . Sports betting has a long history

. . . . . . People want to predict future outcomes and will pay to do it!

. . . . . . An honest "bookmaker" will offer odds that result in equal payoff regardless of outcome

. . . . . . . . . (But why would you think a bookmaker is honest?)

. . . . . . By equalizing the payoffs, the true odds according to group wisdom become evident

. . . About politics

. . . . . . During election season, media and candidates all try to predict

. . . . . . . . . Some of it you don't hear about

. . . . . . polling, trend analysis, and sociological analysis are big

. . . . . . . . . predictions markets have been claimed to do better

. . . about corporate stocks

. . . . . . The stock market is a "leading economic indicator"

. . . . . . Economists pay special attention to leading indicators

If someone asked you to invent a way to collect group predictive wisdom, what would you likely come up with?

. . . Maybe a Delphi-like method

. . . Probably not prediction markets

. . . . . . An early design for prediction markets appears in The Shockwave Rider, by John Brunner, 1975

. . . . . . His term was Delphi Pool

. . . . . . General idea: putting their money at stake makes people generate better predictions

. . . Terrorism and prediction markets

. . . . . . DARPA's PAM (Policy Analysis Market) permitted a prediction market for terrorist attacks

+ we might have forwarning

- terrorists might buy predictions, then make them come true to make money!

. . . . . . In 2003 2 senators found out, PAM was cancelled, and a DARPA program director resigned

. . . . . . . . . not clear that terrorist predictions were ever traded on it

An example prediction market

. . . see www.intrade.com, check short video, and look at the site

. . . HW will be sent tomorrow, will be to invest pretend money in a prediction market, and to research and compare prediction markets and the Delphi method