pageok
pageok
pageok
[Michael Abramowicz, guest-blogging, January 31, 2008 at 9:50am] Trackbacks
Deliberating with Prediction Markets:

Prediction markets may seem inadequately deliberative. On the election markets, for example, participants trade, but do not ordinarily explain their trades. Decision makers in deliberative bodies, in contrast, seek to persuade one another.

Group deliberation, however, has its own perils, including the danger that polarization will move a group to extremes, as Cass Sunstein has shown. Sunstein argues in Infotopia that prediction markets might therefore be superior in some contexts to deliberation. A recent study shows better forecasts with prediction markets than with group deliberation.

In some contexts, though, prediction markets might be more useful yet if individual participants explained their forecasts. I've proposed a type of prediction market called a deliberative market that can increase incentives that participants have to release information supporting their views. In the deliberative market (see my original paper here and this section of my book), a participant's profit or loss is determined by the market forecast some time after the participant's initial prediction, so a participant can earn money only to the extent that others are persuaded in that time frame.

In a post yesterday on the Overcoming Bias blog, Robin Hanson criticizes my argument for not including a robust enough economic model and for allegedly making unrealistic assumptions. In a reply, I maintain that the point is pretty simple, and the math I used was ample to make it. In the comments to my reply, Robin and I come closer to agreeing about the underlying issue of whether the deliberative market increases incentives for information release.

Chris Hibbert, who has developed the robust Zocalo open source prediction market software, meanwhile, makes the sound point that a possible disadvantage of the deliberative approach is that it may stop individuals who are confident of their views but don't think they can persuade others in the time frame from participating in the market. Sometimes, it might be useful to have both a standard and a deliberative prediction market for the same forecasting problem.

There may be other ways of making prediction markets more transparent. An admittedly more speculative section of the book imagines the "market web," which can be used to break down problems. For example, an election market might include a node forecasting the possibility of a recession. Changes in this node's value would automatically affect the value of other nodes, including ultimately the probability that particular candidates would win the election. Such a web could become complicated very quickly, but it could allow a group to produce a consensus model of a complex phenomenon.

Ari Tai (mail) (www):
Can prediction markets be used to counterbalance the current ability of polls to serve the questioner rather than the questioned? As polls move from multipe-choice against a specific question in context to general essay questions they are harder to grade with automation. But essays allow us to derive parameters for human action in postulated circumstance that make for much better models. Where do prediction markets sit in this continuum, if at all?
1.31.2008 11:54am
Crunchy Frog:
Of course prediction markets are not going to be deliberative. The whole point is to beat the market, not to drag it along to your way of thinking.

How many people on Wall Street are going to explain their cattle futures trades?
1.31.2008 3:25pm
Elliot123 (mail):
"In the deliberative market (see my original paper here and this section of my book), a participant's profit or loss is determined by the market forecast some time after the participant's initial prediction, so a participant can earn money only to the extent that others are persuaded in that time frame."

In most markets a trader can cover a position immediately. A trader's profit or loss is determined by the difference between what he paid and what he sells for. Anyone who wants to hold and persuade is free to do so, just like they try to talk the market up or down today. However, nobody pays much attention to the guy with a long position who tries to talk the market up.

Is your model different? If not, then what makes a deliberative market any different from what we use today? Will you demand a minimal holding period for any position? If so, risk becomes enormous, volume and liquidity would dry up, and the market would probably fail.

"Changes in this node's value would automatically affect the value of other nodes, including ultimately the probability that particular candidates would win the election. Such a web could become complicated very quickly, but it could allow a group to produce a consensus model of a complex phenomenon."

How many markets are involved here? Is any one market price changed by anything other than a buy or sell in that particular market? Is this any different from using the behavior of several energy markets to predict drill rig usage next year?
1.31.2008 3:59pm
Michael Abramowicz (mail):
Art Tai -- Not sure that I know enough about polling to answer this question.

Crunchy Frog -- In an ordinary prediction market, you're right. But if your payout depends, say, on the degree to which your change in the market forecasts sticks around one day after the market, you'll have some incentive.

Elliot123 -- Some of your questions are about the mechanics of the deliberative market. For that, I'll leave the book section and paper that I linked to, though there are a range of possible approaches. The basic point is that if you have to persuade others, and can't just buy-and-hold, then you will try to persuade. One thing that's worth emphasizing is that I'm focusing here on prediction markets with relatively esoteric information and a small number of participants, using something like the market scoring rule to provide liquidity. I don't think this approach would make much difference in a highly liquid market like the elections market or the stock market.

Elliot123 again -- On the web market, again I'll leave you to read the book here, especially since this section depends on a number of others. But the short answer is that lots and lots of markets would be involved in the web (all again using something the market scoring rule, which again works well for small groups), and indeed multiple markets would be involved for any given node of the web. If you're not interested in the details, I hope you'll still find the vision attractive -- basically, of lots of markets that allow for group development of a very complicated formula broken down into discrete units.
1.31.2008 4:30pm
Elliot123 (mail):
"If you're not interested in the details, I hope you'll still find the vision attractive -- basically, of lots of markets that allow for group development of a very complicated formula broken down into discrete units."

I think our real world experience indicates that the success of any market is critically dependent on the details. At least that's what we have learned from the markets we do have. That's why I have such interest in the details. They are not something to be dismissed as mere details. They are what makes the market work. My questions are what the typical trader would ask when looking at the market.

I confess I haven't read the book, so I don't know the details. However, if these markets are designed for small numbers of people, the normal market dynamics I am familiar with probably don't apply. Our existing markets are a fine balance of details worked out over long periods.

That said, there's a great deal to be gained from networking multiple controlled markets. That's where a lot of the work in AI and neural nets is targeted today in the larger markets. Info derived from markets A, B, and C can often provide good predictions on market D, while failing to give good info on A, B, or C.
1.31.2008 5:02pm
Michael Abramowicz (mail):
Elliot123 -- I agree fully. And I think neural nets are a good analogy to the market web. Unless and until neural nets become sufficiently intelligent, identifying mechanisms that allow groups to collaboratively break down problems, even where they may disagree, could be useful.
2.1.2008 10:14am