HW4

HW 4, due Tuesday 9/20/2016

Prediction markets for telling the future

1) (40 pts.) Recall the topic that you did a Delphi analysis on and/or a topic that you wrote about in other HWs. Think about finalizing this as a term project topic, or decide on another topic. Now you have a topic (you can change it later if you decide to). Write 399 words or more if it is a paper or short story, or the equivalent in effort if your project is a software system, skit, musical performance, painting, etc., giving an outline or plan for completion. Also, answer the question, "What would be a good thing to do next on this project?"

2) (15 pts.) Look into the intrade.com mess. What happened? What is the current status?

3)  (15 pts.) Would your Delphi method question work as a prediction contract? How would you have to change it to make it work, if it needs to be changed?

4)  (15 pts.) Write up a prediction market contract based on your Delphi method question. It should look something like the sample contract discussed in class. You may need to change the question to make it work for a prediction market contract. However you do not need to actually market it or sell the contract to anyone.

Do not do yet - this will be on the next HW:
Report on two prediction markets (other than intrade.com). They do not have to necessarily describe themselves as "prediction markets" as long as they are, in fact, environments in which people buy and sell based on their estimates of something in the future.

Do not do yet - this will be on the next HW:
Critique the prediction market idea. Why might their predictions be wrong?

5) (15 pts.) Recall the video "Really Achieving Your Childhood Dreams." It is about the future... your future. We saw it in class on DVD, but it is also available on youtube if you want a refresher (or were absent), at http://www.youtube.com/watch?v=ji5_MqicxSo.

a) What were at least three ways he suggested to help achieve your childhood dreams? Do you agree with them? Why or why not?

b) The whole concept of achieving your childhood dreams resonates with many people, but would not resonate with many others. It is a way to "self-actualize," which is a popular philosophy of life in America, perhaps more with certain segments of the the population than others. But there are other philosophies of life. Other philosophies of life that exist here and in other times and places include things like: (a) a good life is achieved by commitment to a particular religious tradition; (b) one's life should be about caring for (traditionally for women) or providing for (traditionally for men) one's family. It has been said that seeking happiness as a direct goal is a good way not to be happy, because happiness is not achievable as a direct goal, but rather occurs as a side effect of helping, or contributing to, or being important to, others.
      Discuss your opinions on this important issue.

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Do not do the old HW below, as it requires a working, easily accessed, prediction market with a broad base of prediction contracts, which no longer exists
Prediction Markets: Tapping the Wisdom of Groups 

Recall that prediction markets try to combine peoples' best judgments using a financial incentive to make sure the judgments really are the best they can make. There is interest in this topic - for example an entire academic journal exists which is devoted to scholarly examination of prediction markets, their structure, how well they work, etc. Nevertheless, the most prominent prediction market company has been severely cut back by (1) the death of its owner on Mt. Everest, and (2) the gov't has forbidden them from doing business in the US. Fortunately the company is still available to use for this HW.

This HW will hopefully be fun & interesting, and will help you gain a hands-on understanding of how prediction markets work.

1) (10 pts.) Recall the topic that you did a Delphi analysis on and/or a topic that you wrote about in other HWs. Think about finalizing this as a term project topic, or decide on another topic. Now you have a topic (you can change it later if you decide to). Write 250 words or more if it is a paper, or the equivalent if your project is a software system, skit, musical performance, painting, etc., giving an outline or plan for completion. Also, answer the question, "What would be a good thing to do next on this project?"

2) (20 pts.) Let's assume you have $1,000 to invest in prediction markets. Naturally, you want to make more money, meaning that when you sell the predictions you bought you will get more than the $1,000 you invested. Identify a prediction market company that you want to pretend invest in. We looked at http://www.intrade.com in class but maybe you can find others: just do a Web search on "prediction market." Using intrade as an example, you can pretend invest in their markets without signing up for a login. In fact, it is not legal to actually invest real $ in them in the US, so we have to pretend.

Check the current prices of some specific markets you are interested in. We looked at a few in class (climate, politics, etc.). For the next question let's assume you are making pretend use of intrade's set of prediction markets. Modify slightly as needed if you are doing it differently.

3) (20 pts.) Find 10 prediction markets that you are interested in. For example, as I write this, intrade has:

"Cuba to be removed from US State Dept list of State Sponsors of Terrorism on/before 31 Dec 2013"
"Last prediction was: $3.90 / share"
"39.0%  CHANCE"

You could pick any prediction markets you like. Make a list of your favorite 10.

4) (20 pts) Recall that the price ($0-$10) reflects the market's crowd-sourced probability estimate (0-1, or 0%-100%). Thus if the price is $3.45 per contract, that reflects the crowd-sourced judgment that the probability of the prediction coming true is 34.5%. For each of the 10 markets, decide whether the current probability is higher or lower than your best judgment. List which of the 10 you judge the current probability to be too low. For example, maybe the market price is $6.60 (corresponding to a likelihood of 66%) but you think 85% (or a price of $8.50) would be more accurate. Those are the ones that you expect to go up, so that you could make money by buying prediction contract(s) now and selling them later, or perhaps holding on to them until the event occurs in which case intrade would pay you the full $10 per contract.

5) (20 pts) Invest your $1,000 in the ones you feel are currently too low. You can buy as many contracts of each prediction that you think is underpriced as you like, as long as the total cost adds up to $1000 (plus or minus a few dollars).

Please note that if you think a prediction market is priced too high, then it would make little sense to buy prediction contracts in that market since you think it will eventually go down!

6) (10 pts., to be assigned toward the end of the semester. 10 if you make money, but only 5 if you lose money - sorry!) You may sell any of your contracts at any time during the semester, and buy any new contracts you like with the money you got from selling (or just hang on to the money if you prefer). You are not required to do this, if you just want to keep the same contracts all semester. To sell, just see what the contracts you have are worth, using the company Web site, and pretend you've sold them. Keep track of what you do by editing your blog entry for this HW. Toward the end of the semester I will ask everyone to sell everything and we'll see how much money you've made or lost!