CFM = Prediction
Markets = Information Aggregation That Predicts
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Aiming
at
Predicting the Future — via Event
Derivatives (Traded Bets), Prediction Markets
(Event Derivative Markets), Prediction Exchanges
(Event Derivative Exchanges)
The prediction market technology is not a disruptive
technology, and the social utility of the prediction markets is
marginal. Number one, the aggregated information has value
only for the
totally uninformed people (a group that comprises those who
overly
obsess with prediction markets and have a narrow cultural universe).
Number two, the added
accuracy (if any) is minute, and,
anyway, doesn't
fill up the gap between expectations and omniscience (which
is how
people
judge forecasters). In our view, the social utility of the prediction
markets lays in efficiency, not in accuracy. In
complicated situations, the prediction markets integrate expectations
(informed by facts and expertise) much faster than the mass media do.
Their accuracy/efficiency is their uniqueness. It is their velocity that
we should put to work.
A prediction market is a market for a contract that yields
payments based on the outcome of a partially uncertain future event,
such as an election. A contract pays $100 only if candidate X wins the
election, and $0 otherwise. When the market price of an X contract is
$60, the prediction market believes that candidate X has a 60% chance
of winning the election. The price of this event derivative represents
the imputed perceived likelihood of the partially uncertain future
outcome (i.e., its aggregated expected probability). A 60%
probability means that, in a series of events each with a 60%
probability, the favored outcome is expected to occur 60 times out of
100, and the unfavored outcome is expected to occur 40 times out of 100.
Each prediction exchange organizes its own set of real-money and/or
play-money markets, using either a CDA or a MSR mechanism —with or
without an automated market maker.
Prediction markets enable us to attain collective intelligence. Prediction
markets produce dynamic, objective probabilistic predictions on the
outcomes of future events
by aggregating disparate pieces of information that the traders bring
when they agree on prices. The event derivative traders are informed by
the primary indicators (i.e., the primary sources of information), like
the polls, for instance. These informed speculators then execute their
transactions based on their anticipations about the future
—anticipations that will be either confirmed or infirmed.
The value of a set of prediction markets consists in the added accuracy
that these prediction markets provide relative to the other meta
predictive mechanisms, times the value of accuracy in improved
decisions, minus the cost of maintaining these prediction markets,
relative to the cost of the other meta predictive mechanisms. A
highly accurate set of prediction markets has little value if some
other meta predictive mechanism(s) can provide similar accuracy at a
lower cost, or if very few substantial decisions are influenced by
accurate predictions on its topic.
Resources On Prediction Markets — Midas Oracle
- Probabilistic Predictions — Midas
Oracle - Post Mortem — Midas Oracle - Best Posts on Prediction Markets — Wikipedia
on Prediction Markets — International
Institute Of Forecasters' SIG on Prediction Markets —
Delicious
on Prediction Markets — OddHead
on Prediction Markets — The
Journal Of Prediction Markets — LinkedIn Group
on Prediction Markets — Wikipedia on
Forecasting — Forecasting
Principles — Wikipedia
on Collective Intelligence — Wikipedia
on The Wisdom Of Crowds — Wikipedia
on Derivatives — Wikipedia
on Knowledge Management — Friedrich
August Von Hayek: The
Use of
Knowledge in Society — Midas Oracle - Internet Strategy — LinkedIn group on Internet Business Models
Generic Google Search — predictions — prediction — forecasts — forecast — "event
derivatives" — "event
derivative" — "event derivative markets" — "event derivative market" — "prediction
markets" — "prediction
market" — "betting
markets" — "betting
market" — "prediction
exchanges" — "prediction
exchange" — "betting
exchanges" — "betting
exchange" — "decision
markets" — "decision-aid
markets" — "information
aggregation" — forecasting — "collective forecasting" — "collective
intelligence" — "wisdom
of crowds"
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Disambiguation
- The Products
- traded bets; traded predictions; event
derivatives; event-driven
derivatives; event derivative contracts; information
derivatives; information derivative contracts.
- The Markets
- bet markets; betting
markets; event derivative
markets; information derivative markets; prediction
markets.
- The Exchanges
- bet exchanges; betting exchanges; event derivative exchanges; information
derivative exchanges; prediction exchanges.
- The Technology
- market-based technology; trading engine;
trading technology.
- Other Terms
- binaries; binary, European call
options; European binary options; binary event options; event
futures; event-driven futures; idea futures; information futures.
- Inappropriate Terms
- event
markets; idea markets; information markets; opinion
markets; predictive markets.
- Sub-Categories of Prediction Markets
- Decision markets are conditional
prediction markets intended (by some idealists) to be used as a
decision-making tool replacing human decision
makers;
- Decision-aid markets are conditional
prediction markets intended to be used as a decision-aid tool advising
human decision makers.
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