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A Few Words on Prediction Markets
Posted By Barry Ritholtz On May 26, 2005 @ 11:36 pm In Markets | Comments Disabled
A recent conversation with a friend made me made realize how easy it is to be misinterpreted, especially on more complex issues.
Let me clarify my views on the so-called prediction markets .
In the past, I have very strongly dissed  some people’s concept of these markets and their ability to “predict” the future. The primary reason for my view is the unfortunate tendency for some people to place way to much faith in the crowd to know the unknowable .
I have yet to see a reasonable explanation as to why IEM missed Dean’s collapse  in the primaries; a commentor notes that the American Idol contract on Tradesports had Bice 90% favored  in the final minutes — but lost.
That said, I rely on many forms of market action to provide color to my expectations. Trend Following is one obvious area. The Fed futures are another. All of technical analysis requires interpreting price and volume changes. I would be lying if I said I didn’t think the Bond market was saying something.
So when I dis prediction markets — especially about their lack of liquidity and small trading pool — its a slight. It reflects my general disdain  for the efficient market hypothesis , amongst other flawed theoretical concepts. When it comes to explaining market behavior, I’m more of a Chaos-theory  man myself.
The difference between the Bond market and say, the Iowa Electronic Markets , NewsFutures  and the Hollywood Stock Exchange  or Trade Sports  is in the size, scale, and liquidity. I am agnostic about these smaller markets, but I do not discount the possibility that any mechanism can potentially provide some insight into future market behaviors.
On a related note, I am reading (quite skeptically) the Wisdom of Crowds  — something quite related to the concept of prediction markets. Its a book that I find slow going because of the continual fisking it requires. While its a pleasure to read Surowiecki ‘s prose, on most of the market related items I’ve gone through there are readily identified logical flaws and unsupported assumptions. (More on this in the future).
As to the Prediction markets value, I remain an interested skeptic.
If you want to learn more about Prediction Markets, than the meta page you want to see is Chris Masse’s prediction market vortal . There’s a ton of data and links there to get you started . . .
Article printed from The Big Picture: http://www.ritholtz.com/blog
URL to article: http://www.ritholtz.com/blog/2005/05/a-few-words-on-prediction-markets/
URLs in this post:
 prediction markets: http://en.wikipedia.org/wiki/Prediction_market
 dissed: http://bigpicture.typepad.com/comments/2004/10/presidential_fu.html
 crowd to know the unknowable: http://bigpicture.typepad.com/comments/2005/02/political_futur.html
 Dean’s collapse: http://bigpicture.typepad.com/comments/2004/01/iowa_and_predec.html
 Tradesports had Bice 90% favored: http://www.tradesports.com/jsp/intrade/contractSearch/searchPageBuilder.jsp?z=1117168465403&expired=true
 disdain: http://bigpicture.typepad.com/comments/2005/03/the_hardly_effi.html
 efficient market hypothesis: http://bigpicture.typepad.com/comments/2004/11/the_mostlykinda.html
 Chaos-theory: http://www.amazon.com/exec/obidos/ASIN/0140092501/thebigpictu09-20
 Iowa Electronic Markets: http://en.wikipedia.org/w/index.php?title=Iowa_Electronic_Market&action=edit
 NewsFutures: http://en.wikipedia.org/w/index.php?title=NewsFutures&action=edit
 Hollywood Stock Exchange: http://en.wikipedia.org/wiki/Hollywood_Stock_Exchange
 Trade Sports: http://www.tradesports.com/
 Wisdom of Crowds: http://www.amazon.com/exec/obidos/ASIN/0385503865/thebigpictu09-20
 Surowiecki: http://www.amazon.com/exec/obidos/search-handle-url/index=books&field-author=Surowiecki%2C%20James/102-1793806-1323309
 prediction market vortal: http://www.chrisfmasse.com/
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