Social Wisdom: Prediction Markets

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1. Putting your
money where
your mouth is

2. People make
predictions
all the time

. . . about
      other peoples'
      reactions

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

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

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

. . . . . . data suggests
            population density
            may be
            a 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!
            (Predict what?)



3. Of course,
prediction is
important
in other areas too

Consider
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 (NWS)
       is a large, highly technical
       gov't agency devoted to
              prediction
       using large computers, etc.

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

. . . weather prediction
      uses computers,
      but other kinds of
      prediction
      can use other methods



4. Like group wisdom...

     Sports betting
     is an example

     Another example:

     . . . Will the
     average global temperature
     for 2010
     be the highest 
     ever recorded?

     . . . at 1:48 this afternoon:
     you can buy a "yes"
     for $8.00
     . . . if you're right -
           you will get $10
    . . . if you're wrong -

Last year's graph of
bets for a hot 2009
Credits: intrade.com, http://data.intrade.com/graphing/jsp/closingPricesForm.jsp?contractId=672070&tradeURL=https://www.intrade.com
 
Why should it
get closer to
100 or 0
as the year
proceeds?
 
Could it ever go high,
then end up low
(or vice versa)?
 
What do you think
the 2010 graph
for
"2010 to be hottest
year on record"
looks like?
(Ok, guess)

. . . we'll check on intrade.com soon...


5. More 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 games
       
       They'll pay
       good money
       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


6. Political prediction...

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

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

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

      . . . but why is
      asking people
      their opinion
      unreliable?

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

7. About corporate stocks...

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

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

. . . . . . Is the stock market
            a prediction market?

8. If someone
asked you
to invent a way
to collect
group predictive wisdom,
what might you 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

9. Terrorism and
    prediction markets

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

. . . . . . Does that
            sound like
            a good idea
            to you?

+ we might have forwarning

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

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

. . . . . . . . . not clear if
                  terrorism predictions
                  were ever traded






10. An example prediction market

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

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