Monday, February 6, 2012

Social Wisdom: Prediction Markets

Prediction Markets

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.)


. . . . . . so the need to predict
            may explain
            why we're human!
            (Predict what?)



3. 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. Crowdsourcing group wisdom...

     Sports betting
     is an example

           Bet right, you win $
           Bet wrong, you lose $

           Sports betting is a
           Prediction Market

     Stock market:

         Buy if expect it to go up
         If you're right, make $
         If you're wrong, lose $

        Stock market is a
        Prediction Market
       
            Other ways of 
            looking at the
            stock market

                What are they?

                So what is 
                the right way?

     Another example
     (from a previous semester)

     . . . Will the
     average global temperature
     for 2012
     be the highest 
     ever recorded?


     . . . at 12:23 on the afternoon before class (Sp '12):
     you could have bought a "yes"
     for $2.50 from intrade.com
     . . . if you ended up right -
           you'd get $10
     . . . if wrong -
           you'd lose your $2.50

    What ultimately happened?

        Jan 16, 2013:

       NASA: 2012 Was 
            9th Hottest Year 
            on Record

  • Are prediction markets gambling? 

Let's go to 
intrade.com 
and check it out

Here are some other prediction markets:



Ok, here's another problem 
with prediction markets

    People might bet 
    for other reasons 
    than to make $

        Why might someone do that?









Bet on something you don't want to happen
If it happens anyway, you'll feel better

Manipulate odds to
affect reality

Can you think of 
a possible example?

       Example:
       Manipulate press coverage 
       of a presidential election

             It's been done!

             Here is (was) the 
             intrade.com graph

             It's expensive!
             Why do it?

Let's go to 
images.google.com 
and look for 
more intrade.com graphs


Why should 
prediction contracts
get closer to
$10 or $0
as they approach
resolution?
 
Could price ever get
high, then end up low
(or vice versa)?
 


5. More about sports prediction markets

Tim Henman
serving at Wimbledon, 2005.
Credits: Photo by Spiralz, license by 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!

. . . A theoretically ideal
      "honest bookmaker"
      will offer odds
      that result in
      equal payoff
      regardless of outcome


. . . (But how do
      real bookmakers
      differ from that?)



. . . By equalizing the payoffs,
      the true odds
      according to group wisdom
      become evident

. . . . . The $$ bet are 
          merely redistributed


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!

. . . But they aren't perfect

  • Manipulation can skew results


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:
            when real money
            is at stake, 
            people predict better

                  Do you agree?



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?

. . . . . . How might it 
            help fight terrorism?










+ 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. Another kind of prediction market

. . . http://scicast.org
     
. . . . . . .(Forecasts affect each other, etc.)


12. As time allows, 
let's 

      - try our own prediction market! 
         (suggestion: use Delphi first to get started)

No comments:

Post a Comment