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“Prediction Markets: Does Money Matter?”
CS97 Background PresentationDaniel May
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Prediction MarketsWhat are they?
● Methods designed to “aggregate information and produce predictions about future events”
● E.g. Iowa Electronic Markets, TradeSports.com, NewsFutures.com
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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
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Real Money● Idea: People make better more “rational” decisions when using their own
money
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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
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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
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Mayweather vs. Prisoner (TradeSports.com)
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Mayweather vs. Prisoner (NewsFutures.com)
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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
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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
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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
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Other Background Information● NFL games were used over 14 weeks
○ 2 teams play one another○ Win, lose, or tie
■ Tieing is very unlikely
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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)
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Questions?