Tuesday, December 11, 2007

New, Simple Prediction Market Tool (Predictify.com)

Prediction markets have been around for a long time and I have mentioned them here briefly before. Fundamentally, they operate like futures markets (some would say gambling establishments). In the simplest version of these systems, people essentially place bets on what the future will bring. The person who gets closest wins. In more complex systems, people can actually buy and sell the "bets".

The idea is that, if you have enough people involved, the going price will converge, over time, on the correct price. Of course, anything can be "valued" this way and probably the most famous predictive markets are the Iowa Electronic Markets. They have run a market on who will win the presidential election (among others) for a number of years and have been very successful at predicting the results. Currently you can buy futures -- i.e. contracts that will pay a dollar the day after the presidential election -- in the eventual Democratic candidate for about 60 cents and contracts for the eventual Republican candidate for about 40 cents. These prices predict, at this point, a Democratic victory because people are willing to pay more for a Democratic candidate than a Republican candidate while still only getting a dollar after the election.

The US government has played around with this idea (FutureMap was a predictive market idea that was linked to the ill-fated Total Information Awareness program which is a whole other story...) and probably still is in one form or another.

The goal of all these markets is to tap into the collective wisdom of many people to help make accurate predictions concerning the future or at least the odds that certain futures will occur. There are a number of books and papers that touch on this topic right now. The Wisdom of Crowds is one but my favorite is Gut Feelings.

That is a long preface to get to a new predictive market tool available at Predictify.com. I have used it to set up a market in oil prices that you can see here. It is an easy way to get input on discrete questions. The team at Predictify help you mold your question and make it more specific in addition to helping you identify the exact source you will use (in my case, Bloomberg.com) to identify the winners and losers. In all, it was painless and I already have over 50 "answers" to my question.

If you are interested in exploring the power of another predictive market, particularly one with a national security focus, see Strategypage.com. You can search for other predictive markets here. For general information about the prediction market industry (yes, it is an industry) follow the newly formed Prediction Market Industry Association.

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