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Transcript of Smarter Markets: Bringing Intelligence into the Exchange Example: Smarter Prediction Markets David...
Smarter Markets: Bringing Intelligence into the Exchange
Example: Smarter Prediction Markets
David PennockMicrosoft Research
NYSE 1926
http://online.wsj.com/article/SB10001424052748704858404576134372454343538.html
NYSE 1987
http://online.wsj.com/article/SB10001424052748704858404576134372454343538.html
NYSE 2006-2011•
2011 Deutsche Börse AG
•2007 Euronext
•2006 Archipelago, ipo
NYSE 7pm Sep 10, 2012
New Markets – Same CDA
2012 September 10 7:23 p.m. ET
2012 September 10 7:23 p.m. ET
Between 3.0% and 3.7% chance
http://www.predictwise.com/maps/2012president
Design for Prediction
• Goals for trade– Efficiency (gains)– Inidiv. rationality– Budget balance– Revenue– Comp. complexity
• Equilibrium– General, Nash, ...
Design for Prediction
• Goals for trade– Efficiency (gains)– Inidiv. rationality– Budget balance– Revenue– Comp. complexity
• Equilibrium– General, Nash, ...
• Goals for prediction– Info aggregation– 1. Liquidity– 2. Expressiveness– Bounded budget– Indiv. rationality– Comp. complexity
• Equilibrium– Rational expectations
Competes with:experts, scoring rules, opinion pools, ML/stats, polls, Delphi
Design for Prediction
• Goals for trade– Efficiency (gains)– Inidiv. rationality– Budget balance– Revenue– Comp. complexity
• Equilibrium– General, Nash, ...
• Goals for prediction– Info aggregation– 1. Liquidity– 2. Expressiveness– Bounded budget– Indiv. rationality– Comp. complexity
• Equilibrium– Rational expectations
Competes with:experts, scoring rules, opinion pools, ML/stats, polls, Delphi
Why Liquidity?
Why Liquidity?
Low liquidity takes the prediction out of marketshttp://blog.oddhead.com/2010/07/08/why-automated-market-makers/
Between 0.2% and 99.8% chance
Why Expressiveness?
Why Expressiveness?
Why Expressiveness?
Why Expressiveness?
• Call option and put options are redundant• Range bets require four trades
(“butterfly spread”)• Bid to buy call option @strike 15 can’t match
with ask to sell @strike 10• Can’t set own strike• Bottom line: Lacks expressiveness
Why Expressiveness?
• Dem Pres, Dem Senate, Dem HouseDem Pres, Dem Senate, GOP HouseDem Pres, GOP Senate, Dem HouseDem Pres, GOP Senate, GOP House...
• Dem PresDem HouseDem wins >=270 electoral votesDem wins >=280 electoral votes...
Industry Standard
• Ignore relationships:Treat them as independent markets
• Las Vegas sports bettingKentucky horseracingWall Street stock optionsHigh Street spread betting
A Better Way(Or,... Bringing trading into digital age)
• Expressiveness– Linear programming– Bossaerts, Fine, Ledyard: Combined Value Trading– http://bit.ly/multipm
• Expressiveness + Liquidity– Automated market maker– Always quote a price on anything– Downside: requires subsidy/risk
Example: Liquidityand Expressiveness
Getting Greedy
• Design a marketfor information on exponentially many things
• “Combinatorial prediction market”
Combinatorial securities:More information, more fun
• Payoff is function of common variables,e.g. 50 states elect Dem or Rep
Combinatorial securities:More information, more fun
• Dem will win California
Combinatorial securities:More information, more fun
• Dem will lose FL but win election• Dem will win >8 of 10 Northeastern states• Same party will win OH & PA
OH
PA
Combinatorial securities:More information, more fun
• There will be a path of blue from Canada to Mexico
OR
WA
Some Counting
• 54 “states”: 48 + DC + Maine (2), Nebraska (3)• 254 = 18 quadrillion possible outcomes• 2254 1018008915383333500 distinct predictions
More than a googol, less than a googolplex• NOT independent
A tractable combinatorial market maker using constraint generation
ACM EC 2012
MIROSLAV DUDÍK,SEBASTIEN LAHAIE,DAVID M. PENNOCK
Thanks: David Rothschild, Dan Osherson, Arvid Wang, Jake Abernethy, Rafael Frongillo, Rob Schapire
http://PredictWise.com/fantasy
Predictalot alpha
Combo Prediction Markets:More Info
Gory detailsWhat is (and what good is) a combinatorial prediction market?
http://bit.ly/combopm
More accessibleGuest post on Freakonomics
http://bit.ly/combopmfreak