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The Chris. F. Masse 2004 Year-End Awards — Prediction Markets & Decision Markets — by Chris. F. Masse — 2004-12-31 — [NEW: The Chris. F. Masse 2005 Awards]


The questions I pose today to Enterprise Commanders are these:

The envelope, please!

1. Biggest Winner of 2004: InTrade / TradeSports / TradeBetX — Fortune's Geoffrey Colvin, National Review's Donald Luskin and Reason Foundation's George Passantino rightfully praised this Irish exchange. See this InTrade graph:
2004 George W Bush is re-elected as United States President
InTrade - George W Bush is re-elected as United States President.


2. Biggest Loser of 2004: NewsFutures — This play-money exchange had mixed feelings preceding the 2004 US election (alternatively putting Kerry or Bush ahead), and predicted John Kerry on the election day's early morning. It has an omelet on its face.
3. Best Scholar of 2004: Prof. Paul W. Rhode and Prof. Koleman S. Strumpf, for their discussion on market efficiency in their paper, Historical Prediction Markets: Wagering on Presidential Elections. - (2004's PDF - 2003's PDF, which is a longer paper)


4. Worst Person/Entity of 2004: Sporting Options, a betting exchange that bellied up in November.

5. Most Defining Moment of 2004: The quasi-immediate rebounds of the Bush contract, at TradeSports/InTrade, following politically motivated speculative attacks, as described by Donald Luskin.


6. Turncoat of the Year 2004: Prof. Thomas Rietz, front-office man for the Iowa Electronic Markets, who came out one week before the 2004 US election day with a controversial comment saying that using the Iowa exchange as a predicting tool was "not that much better than a coin flip", and then once the dust settled, on the 5th of November, trumpeted that the "Iowa Electronic Markets forecasted Bush win in presidential election".
7. Most Charismatic: This award is shared between...
  1. Donald Luskin (CEO of TrendMacrolytics), for his series of media infiltrations regarding prediction markets;
  2. Professors Justin Wolfers and Eric Zitzewitz, for the high Google PageRank popularity of their Prediction Markets paper - PDF.

8. Most Boring: The Canadian CEO-meter on BetFair.


9. Fairest Rap of 2004: "The traders are more poll-followers than poll-beaters". (Daniel Gross)


10. Bummest Rap of 2004: "There are few, if any, predictive powers of Political Futures Exchanges". (Barry Ritholtz)
11. Best Comeback of 2004: The Yasser Arafat Termination contract on TradeSports/InTrade [following news of his hospitalization, and which otherwise hadn't attracted much excitement and conviction among the traders].


12. Most Original Thinker of 2004: Dr. David M. Pennock, who invented a dynamic pari-mutuel market, which acts as hybrid between a pari-mutuel market and a continuous double auction. - (PDF)


13. Most Stagnant Thinker of 2004: Lawmakers around the world (but in Ireland and Great Britain) who ban prediction markets on the ground that it amounts to online gambling.


14. Best Photo Op of 2004: Not awarded this year.


15. Enough Already!: The Iowa Electronic Markets as the leading political futures exchange. Hell no! The stenographers of the American Press should now focus on the Irish exchange, TradeSports/InTrade.


16. Worst Lie of 2004: Trade Exchange Network Group CEO John Delaney, who said to stenographer Mark Hulbert: "We think our markets accurately reflected the shift in [CIA George] Tenet's retirement probabilities so we weren't surprised by today's announcement". Look at this InTrade graph, and judge by yourself:
CIA_Director_George_Tenet_Departure_on-before_30_June_2004
InTrade - CIA Director George Tenet Departure on/before 30 June 2004


17. Person of the Year 2004: Prof. Robin Hanson — Fortune's Geoffrey Colvin wrote that business persons should listen to the people who got the [2004 US] election right. Well, if there's one man who has a lot to say, it's Robin Hanson, a professor now with tenure at George Mason University. In his own words: "I was the first to publish proposals to widely apply speculative markets to better aggregate information for science and policy, to subsidize them via automated market makers, and to lower judging cost via audit lotteries" (PDF). As everybody knows, Prof. Robin Hanson is a prediction markets co-inventor (circa the fall of 1988) and the main economist behind the 2000–2003 US DoD's DARPA's IAO's FutureMAP / Policy Analysis Market project (PDF). Today's real-money prediction exchanges have been benefiting indirectly from his pioneering studies, and in return, their blatant success in foretelling the 2004 US election validates his main thesis (i.e., idea futures markets will do good to our global civilization), helps pulling its far-fetched extensions (e.g., democracies should be governed by conditional prediction markets) out of the closet, and makes his technology (the combinatorial information market - PDF) a hot forecasting tool for private and public decision-makers.


18. Destined for Stardom: HedgeStreet — [2005-04-18: HedgeStreet Interview - Interview with Russell Andersson, VP Instrument Originator and Co-Founder of HedgeStreet, and Ursula Burger, VP Corporate Marketing and Co-Founder of HedgeStreet.]


19. Destined for Oblivion: NewsFutures' public, play-money markets. — [Note that I say nothing about their corporate markets.]

20. Best Theater of 2004: The US political futures markets.


21. Worst Theater of 2004: The seven-hour Kerry presidency sending the Bush futures contract down to 30% at 5 p.m. on election day. Argh!... Nom de Dieu!!... See this Bloomberg graph:

intraday_chart_Bush_futures
Bloomberg - Intraday chart of the Bush futures


22. Worst Scandal of 2004: This award is shared between...
  1. Blaming BetFair for turpitudes that pre-existed in a rotten environment (the horse race betting markets) and that only an electronic betting exchange can uncover.
  2. Forbidding jockeys and horse owners to hedge against their possible defeats. Why preventing financial innovation in sports?

23. Most Under-Reported Story of 2004: Hey, folks, VC-backed Californian HedgeStreet managed to get CFTC approval to set up a Web-based prediction exchange listing contracts that have a "legitimate economic purpose", with no requirement to set up a physical pit, thus disproving long-time CFTC-critic Robin Hanson, and all this up against the lobbying effort of both the CBoT and the CME, which both opposed strongly this new contender. California rules!


24. Most Over-Reported Story of 2004: "The orange-juice futures market is better at predicting the weather in Florida than the Weather Service." Come on!... It was just a one-shot study, published 20 years ago. (Reference below.)


25. Best Dollar Spent: On the Bush futures contract(s), of course! — [on either TradeSports/InTrade or BetFair, which also traded political futures markets, albeit less sophisticated and 3 times less popular than InTrade's ones.]


26. Biggest Waste of Money: You expect me to say "on the Kerry futures contract", eh? Actually, the biggest waste of money in 2004 was for leftist Prof. Andrew Tanenbaum (who [kind-of] taught computer science to Linus Torvalds) to plunk down $3,000 in order to set up, run and advertize a state polls aggregation website that predicted 281 for Kerry and 257 for Bush. Hey Andy, here's the lesson you've learned the hard way, at your own expense: Prediction markets have more predictive power than polls.


27. Boldest Tactic of 2004: That unnamed speculator with political motives who aimed at exploiting the narrowness of the InTrade Bush/Kerry futures markets. It failed miserably, granted, but it was damn bold.

28. Best Idea of 2004: Professors Justin Wolfers and Eric Zitzewitz "persuaded TradeSports to run experimental contingent betting markets, in which one bets on whether President Bush will be re-elected, conditional on other specified events occurring. Early results suggest that market participants strongly believe that Osama bin Laden’s capture would have a substantial effect on President Bush’s electoral fortunes, and interestingly that the chance of his capture peaks just before the election." This clever idea proves, once again, as I have said from day one, that bet constitutions should be externalized to scholars.


29. Worst Idea of 2004: Running conditional prediction markets under standard technology (CDA), and not implementing a combinatorial information aggregation technology. When Rummy said, "You go to war with the Army you have, not the Army you might want or wish to have at a later time", even Republicans agreed that it was not his best line. Let's build a better tool before we address formidable challenges.


30. Sorry to See You Go: The betting on the U.S. Homeland Security Advisory System, at TradeSports/InTrade. Why these interesting markets (which quantified at +20% the so-called October surprise) were faded out, I cannot for the life of me understand.

31. Fifteen Minutes of Fame: This award is shared between...
  1. Prof. Charles F. Manski, for his paper Interpreting the Predictions of Prediction Markets - (PDF - PDF mirror);
  2. Barry Ritholtz, for his ranting and raving about political prediction markets.

32. Most Honest: Prof. Robin Hanson, who placed a bet with TradeSports/InTrade, lost 100% of his speculative investment, and did not hide in a spider hole (as I would have done to make sure the world doesn't have wind of this nuclear blunder). "I lost my shirt betting the United States would not capture Saddam Hussein", he said. The guy was unlucky (or plain dumb), but boy was he frank.


33. Best Spin of 2004: Trade Exchange Network Group CEO John Delaney persuading stenographer Dick O'Brien that his Ireland-based company might have played a role in the 2000–2003 US DoD's DARPA's IAO's FutureMAP / Policy Analysis Market program. - (PDF mirror)


34. Most Under-Rated: Judiciary bets (Martha Stewart, Michael Jackson, Kobe Bryant, SCO versus IBM, etc.), on TradeSports/InTrade or elsewhere. They are the quintessence of the prediction markets ("subjective judgments by established judges can be used to settle bets" wrote Prof. Robin Hanson). The Martha Stewart futures market showed sustained long-term predictive power (see this InTrade graph, pictured below), albeit with a peak reflecting punctual doubt and undecidedness some time just before the announcement of the sentence. [Martha got only 5 months behind bars, so this InTrade market was indeed predictive.]
Martha Stewart to Be Sentenced 14 months or More
InTrade - Martha Stewart to Be Sentenced 14 months or More


35. Most Over-Rated: Sports predictions (e.g., the Red Sox curse), because of the bias that otherwise-rational traders are stuck with. Fore more on this, read the Paul C. Tetlock paper - (PDF). And see this InTrade graph:
Boston_Red_Sox_to_Win_2004_World_Series
TradeSports - Boston Red Sox to Win 2004 World Series


36. Macro-Prediction: In the future, more CFTC-approved, Web-based, non-intermediated exchanges (designed as contract makers and registered as derivatives clearing organizations) are going to trade European-style, binary option contracts that do not have underlying cash markets. As their primary purpose should officially be hedging, these exchanges will list only contracts that have a "legitimate economic purpose". It is easy to forecast that these hedging-purposed markets are going to show predictive power.


Question: Is my analysis dominantly correct or dominantly incorrect? I ask you, the pajamas bloggers. Please, be prepared to discuss this on your own blog. I will later on update this webpage with links to your best takes.


Thanks for hanging in there with me!


Chris. F. Masse

Backward Postscript:


2005-01-09: Google alerted me only this Sunday, January 9th, 2005, about CommerceNet Labs associate Chris Hibbert's zMarket. - (Here's a December 2004's PDF, which kind of shows that Chris Hibbert is Robin Hanson-compatible.) - It missed the mark for the year 2004, but could be a strong candidate for 2005. Stay tuned! - [2005-03-12: Commerce.Net's Chris Hibbert has published, on Wednesday, March 09, 2005, a report about Zocalo, an open-source software platform for deploying prediction markets - (PDF).]


2005-01-10: I realize that not including Dr. Robert W. Hahn in my list was an injustice. His entry in the field in 2004 marked the arrival of a new kind of scholar. Here come the politically connected scholars, joining the fray. Dr. Robert W. Hahn is the executive director of the AEI-Brookings think tank, a bipartisan joint venture between NeoCon Central (Pat Buchanan's lingo for Newt Gingrich's American Enterprise Institute) and the famous, (centrist? liberal?), respected institute. Robert Hahn said that AEI-Brookings aims at being a source of information all sides "can really trust". (The New York Times, 1998-07-30) - His latest paper on prediction markets is: A New Approach for Regulating Information Markets - (PDF) - by Robert W. Hahn and Paul C. Tetlock - December 2004.


2005-01-11: In my 2004 awards list, I was tough on a play-money exchange (NewsFutures) who got the 2004 US presidential election dead wrong. I believe that if you are in the "predicting the future" industry, you have to be held accountable. The political prediction markets was, at inception (IEM), has been and always will be the killer application of the field. Either you pass this litmus test, and you're in the field, or you fail it, and you're out. However, to have a more balance view of the predictive power of play-money exchanges, you can't leave this webpage without reading this excellent paper:

2005-01-17: Among those nominated for the "Bummest Rap of 2004" was Jim Wolf, director of the Indiana University Public Opinion Laboratory, for his definitive and premonitory assessment that a political futures market "would be laughed right off the podium" at a scientific conference. "There really is no scientific ground for saying that this kind of approach is a legitimate or let alone a better measure", Wolf said. Well, let's wish the participants of the upcoming DIMACS prediction markets conference will have a good laugh... at him.


2005-01-30: I've read with great interest Servan-Schreiber's rebuttal (PDF), but I still stand for what I said. Over its lifetime, the NewsFutures Bush/Kerry contract generated contradictory predictions (as you can see clearly in the first graph presented on Servan-Schreiber's document, which shows the contact over and then below and then over and finally below the 50% line), and foresaw Kerry for president on election day's early morning (48% at 9:43 AM ET). By contrast, over its lifetime, the InTrade Bush/Kerry contract did persistently predict Bush, and still foresaw Bush on election day's early morning (55.3% at 8:33 AM ET). The BetFair Republican/Democrat contract also fared well (55.9% at 8:30 AM ET). Thus, kudos to InTrade and BetFair, which were able to predict this close election.


2005-02-16: In an e-mail reply to me, blogger David Schneider-Joseph complained that I was unfair to Thomas Rietz because "in the first case, Rietz was referring to the winner-take-all market; and in the second case, he was referring to the vote-share market". Not true. To make things clearer, I've expanded the quotes of his Press release. (Thanks anyway for your comment.)


2005-03-05: This quote relates to the "best idea of 2004 award":

2005-03-07: Interesting exchange between NewsFutures' Emile Servan-Schreiber and Stanford U. professor Eric Zitzewitz on the WashPost site (mirror), circa July 31, 2003:

2005-03-15: This relates to the "most original thinker of 2004 award": What is a dynamic pari-mutuel market (DPM)? (Excerpted from The Tech Buzz Game. Click on "Tell Me More".) - (PPT)
2005-04-01: The August 2004's comments below are excerpted from B.K. Marcus' succulent postings on the Ludwig von Mises Institute's website (Can Markets Predict Elections?) and its associated blog (Mises.org Updates).

2005-04-17: This refers to the "over-reported story":

2005-04-27: This refers to the "over-reported story":

2005-05-03: A business columnist wrote to me, and I would like to post here two points I made in my answer to him:
  1. Barry Ritholtz is a smart and courteous man. What he said about the prediction markets applied to the U.S. primaries were interesting, and you know what, that's the reason I linked to him. I wanted my readers to discover his arguments. However, Barry Ritholtz was awarded a Razzie because of his conclusion, namely that "There are few, if any, predictive powers of Political Futures Exchanges", which contradicts just every paper published on prediction markets since the end of the eighties.
  2. Donald Luskin is a libertarian Republican. He's a nice man. I'm sympathetic to most of his views (and, at occasional times, I would disagree with him). Precisely, in the field of prediction markets:
    1. Donald Luskin was the first to report extensively on the aberrations endured by the Bush futures contract on TradeSports/InTrade, while the rest of the Press was napping.
    2. Donald Luskin offered an hypothesis (political manipulation by a Soros-inspired agent). Many commentators derided his interpretation. I'm still waiting for them to come up with an alternative explanation that could be satisfying. The jury is still out, but no witness dares to take the stand. (Take this as a challenge, man!).

2005-06-21: This refers to my macro-prediction:

Portal
Updated: Friday, January 28, 2005



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