2. An Introduction to Prediction Markets (a.k.a. Idea Futures, Decision Markets, Information Markets, and Event Markets) Presented by: Muhammad Daniyal Shafiq

3. Simple Definition of Prediction Markets A place where information is aggregated via market (or other) mechanisms for the primary purpose of forecasting events, or the probability that an event will occur

4. outcome / contract outcome / contract outcome / contract outcome / contract outcome / contract All Others The “who will win the 2008 presidential election” market the market (the event)

5. Contract Hillary: Hillary Clinton WILL BE our next president $0.00 $1.00 Price 0% 100% Prediction $0.26 26% Hillary Clinton has a 26% chance, at this point in time, of being our next president.

6. All Others The “who will win the 2008 presidential election” market the market $0.26$0.20$0.18$0.12$0.24 26%20%18%12%24% = 100%

8. Basic Elements of a Prediction Market 1.The Market - Markets are generally created around a specific topic or event, and contain the contracts which are traded. Examples: The “Who will win the 2008 Presidential Election” Market 2.The Contract – A specific prediction that the trader can buy or sell Examples: Hillary Clinton 3.Trading Platform – The way that someone interacts with the market

9. Basic Elements of a Prediction Market, cont. 4.Traders – the people who come to a market and participate by buying and selling Marginal traders – knowledgeable traders Noise traders – traders who are not knowledgeable, or have some motivation for trading other than what they think the true price should be. 5.Liquidity – the number of trades 6.Currency –real money or fake money.

10. Simple Definition of Prediction Markets A place where information is aggregated via market (or other) mechanisms for the primary purpose of forecasting events, or the probability that an event will occur Why? –Wisdom of the Crowds – “Under the right conditions groups can be remarkably intelligent and possibly smarter than the smartest person.” James Surowiecki –Markets provide incentives for information discovery and truthful revelation of beliefs –Efficient Market Hypothesis – all available information incorporated into the price

11. HP’s Prediction Market In 1996 a group of experimental economists at Hewlett-Packard and CalTech launched a market at HP They created a market where participants (product and finance managers, and sales staff) could trade contracts based on expected sales of certain products The researchers concluded that if “these markets are large enough and properly designed, they can be more accurate than other techniques for extracting diffuse information, such as surveys and opinion polls.”

12. video

13. Who uses these things? ?

17. and others....

18. Consumer prediction markets Iowa Electronic Markets Intrade Prediction Markets simExchange Hollywood Stock Exchange –Oscar nominees LongBets Source: http://www.hsx.com/security/view/INCPT

19. Social business intelligence in organizations PMs in use at 100-200 US organizations (July 2010) –Ex: HP, BestBuy, Electronic Arts, Boeing, Amazon, Harvard, GM, Hallmark, P&G, Ford, Microsoft, Chevron, Lockheed Martin, CNN, Adobe, American Express, Bosch Applications –Project management, risk management –Revenue forecasting, demand planning, capital budgeting –Idea management (rate, filter, prioritize ideas) Vendors –Consensus Point, Crowdcast, Bright Idea, Qmarkets, Inkling Image: http://torontopm.files.wordpress.com/2009/06/quarterly-sales-graph.jpg?w=300&h=234

20. Where are we now? No perfect site, but lots of experimentation Industry Corporate A growth industry...?

21. Q&A Questions I haven’t answered yet...

22. Thank You!