Comments on: WeatherBill shows the way toward usable combinatorial prediction markets

By: David Pennock

David Pennock — Fri, 26 Sep 2008 10:53:18 +0000

Here's a nice article on WeatherBill in Portfolio.com. Found via Michael Giberson.

By: Mike Chadney

Mike Chadney — Fri, 22 Aug 2008 09:23:44 +0000

I think the emerging prediction exchanges and market makers are the first of a breed and demonstrate what some call the “democratization of capital”. As with all products, pricing tends to be rich at the beginning of the cycle and as more competitors enter then prices tend to the point where demand and supply are satisfied. I think we are some way off that point for weather but you may find financial markets reach that point quicker.

Hedge Street (www.hedgestreet.com), recently bought by IG Index, a UK company now offers regulated fixed-odds bets on financial markets to US residents and regulated by the CFTC. I think this is a portent to some major changes to the way risks are priced. Many of these instruments rely on crowd theory pricing as there is no accurate “formula” for pricing these types of risk.

To determine the fair value of a weather derivative, demand and supply need to be satisfied. I see a huge market developing here as the utility function for weather is particularly personal. Someone getting married outside would place a much higher value on a hedge for a rainy day than a rowing competition organizer.

Lets say three cheers for any new business entering this field and making risk units tradable in small size – yes that does mean my company too (www.cityodds.com)

By: David Pennock

David Pennock — Wed, 20 Aug 2008 21:20:21 +0000

Mike: Thanks for the link: looks good.

Sergei: Good point, you’re right: I should have mentioned that the WeatherBill market maker, like other insurers, bakes in a significant markup, probably much greater than any pure prediction market or betting exchange could get away with.

By: Sergei Rodionov

Sergei Rodionov — Wed, 20 Aug 2008 17:22:58 +0000

I play around with the quotes provided by Weatherbill, and it looks like you cannot win betting on weather because the cost of contracts they offer is ridiculously high. Even if I can correctly predict the sign of temperature anomaly, say, two months in advance for a given location, the payoff exceeds the cost of the contract only in about one third of the years, and the total payoff is about equal to the total amount I spent on the contracts. Since it is impossible to correctly predict the sign of the anomaly in 100% cases, I will definitely loose on the long run. There is no sense at all to buy their contracts at the prices they offer.

By: Mike Chadney

Mike Chadney — Wed, 20 Aug 2008 10:30:04 +0000

That’s a nice piece on the emerging tradable prediction market. I agree with some of your other posts that the US should regulate most forms of betting (with economic purpose) and generate much needed tax revenue at the same time.

You might like to have a look at http://www.cityodds.com. This is a UK based tradable market prediction online service. Real money can be wagered (UK only) for tightly priced one day financial Binary bets and the terms of those bets determined by the user. Trades can be for as little as £5 or £10.

I’ll keep a close eye on the CFTC and gaming regulators in the US. I’d like to see all individuals who chose to trade or hedge risk to be given access to the capital markets as the professionals.