“Prediction Markets: Does Money Matter?”

CS97 Background PresentationDaniel May

Prediction MarketsWhat are they?

● Methods designed to “aggregate information and produce predictions about future events”

● E.g. Iowa Electronic Markets, TradeSports.com, NewsFutures.com

TradeSports.com vs. NewsFutures.com● TradeSports.com

○ Use real money○ Win money if correct about prediction

● NewsFutures.com○ Use fake money○ Win prizes if among the top winners of fake money

Real Money● Idea: People make better more “rational” decisions when using their own

money

Real Money (cont.)● Pros:

○ Incentivize seeking out information in bet placements○ Predict sports games more objectively

● Cons: ○ Only certain people can participate in real money prediction markets

■ Need spare $$$■ Must be legal for agent to participate in market

Fake Money● Pros:

○ More agents can participate■ Fewer legal constraints & barriers to entry

○ Money can only be earned through the game

● Cons:○ Disincentivizes information gathering

Mayweather vs. Prisoner (TradeSports.com)

Mayweather vs. Prisoner (NewsFutures.com)

Why Sports?● Pros:

○ Natural interest sparks trading○ Many data points○ Objective measurement

● Cons:○ Fans betting based on team allegiances○ Information to be discovered??

■ May not be applicable to other fields

Proper Scoring Rule● Scoring rule that encourages truthful assignment of probability

○ Agent will maximize expected score by using a truthful probability○ Works for meteorologists & bettors

● Quadratic scoring rule used is one of many proper scoring rules○ 100 - 400*lose_prob2

○ Probability of 50% will yield 0

Proper Scoring Rule Example● Say you believe there is a 75% probability the Saints will beat the Falcons

If Saints Win If Saints Lose Expected Value

Bet 75% Prob. 75 points -125 points 25 points

Bet 76% Prob. 76.96 points -131.04 points 24.24 points

Bet 74% Prob. 72.69 points -119.04 24.96 points

Other Background Information● NFL games were used over 14 weeks

○ 2 teams play one another○ Win, lose, or tie

■ Tieing is very unlikely

Citations● “Extracting Collective Probabilistic Forecasts From Web Games” (Pennock

et. al)○ Web games accurately predict advances in science technology, entertainment awards,

and Formula 1 races

● “Prediction Markets” (Wolfers & Zitzewitz)

Questions?