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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"

1. CFM = Prediction Markets + Information Aggregation Mechanisms — Site Feed — CFM @ Google Reader

2. Midas Oracle .ORG = Prediction Markets + Collective Forecasting — Site Feed — MO @ Google Reader

3. Midas Oracle .NET = Internet Strategy = Business Models + Organic Marketing — Site Feed — MO @ Google Reader

4. Midas Oracle .COM = Internet Strategy + Collective Forecasting — Site Feed — MO @ Google Reader

• 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
  1. Decision markets are conditional prediction markets intended (by some idealists) to be used as a decision-making tool replacing human decision makers;
  2. Decision-aid markets are conditional prediction markets intended to be used as a decision-aid tool advising human decision makers.

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• Prediction Markets For People
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