Friday, May 9, 2008

Intrade - The Prediction Market

If you're not so good at picking winning stocks, maybe you should try your hand at picking the next American Idol winner, or President, or earthquake. These are all things you can place bets on at Intrade.com.

Here's how it works. You buy "shares" in specific outcomes of events such as "Tina Fey wins an Emmy". The price is determined by how many other people, out of all the people betting on the event, buy into the same prediction. If you're right, Intrade pays you $1 per share. For example, John McCain is pretty much a lock for the Republican nomination. Buying shares in "John McCain" to win the Republican nomination will currently cost you around 95 cents. Why not $1? Is there any doubt? There's always doubt. He could get hit by a bus tomorrow. If so, you lose.

The site is run out of Ireland. Internet gambling is illegal in the U.S. The government once toyed with the idea of using the same methodology though. It was thought it might be helpful in determining the timing and location of the next terror attack. The idea was eventually deemed to repulsive to actually go ahead with.

The difference between this type of collective thinking and consensus by committee is that all bets are placed by isolated individuals. Each uses their own set of input, reasoning and experience to come to an individual conclusion. The result is the cumulative effect of individual decisions rather than a group decision which may have been arrived at through the persuasive efforts of one or two strong individuals. It has proven to be a very effective means of prediction.

So why would the government not put such a system to use. At first glance it seems a no-brainer. But, then you have to realize that the same thing that makes it effective, makes it dangerous. People may choose to invest in a candidate that they aren't going to vote for because, even if they don't like them, they believe they are going to win. That's what makes it accurate. When there's money on the table, emotions get set aside. However, money on the table can also be an incentive to influence the outcome of an event you've bet on. The stock market and currency markets can be manipulated. So can the predictions market. Thousands of people with a vested interest in seeing someone succeed, or not, is a market ripe for the pickin's of unscrupulous mercenaries.

Still, as I said, the same is true for the stock market, the currency market, and the corn futures market for that matter. We haven't outlawed those and they are just as prone to manipulation.

I guess Intrade should put another trading vehicle up on the board - If/When the "powers that be" will shut them down.

1 comment:

Audrey said...

Check out www.bet2give.com It is a charity driven prediction market - you can "bet" real money on similar predictions and all of the winnings go to your designated charity.