commentary, economics, prediction markets, startups, trends

It’s Arab Spring, but is it Prediction Market Winter?

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Is the growing prediction market industry graveyard an omen?

It’s hard to ignore the accumulating bodies, including, may they rest in peace, PPX, Hubdub, Protrade, Tradesports, Newsfutures, Hedgestreet, Yoonew, TheTicketReserve, FirstDibz, BettorFan, ipreo, Tech Buzz Game, The WSX, Storage Markets, FTPredict, real HSX, BizPredict [1], CasualObserver.net, Cenimar, Alexadex [2], Askmarkets, Truth Markets, BetBubble, Betocracy, CrowdIQ, Media Mammon, Owise, RIMDEX, Trendio [3], TwoCrowds, BBC celebdaq/sportdaq, Betfair Predicts, chrisfmasse.com [4], and more.

Is this churn rate normal for startups in general, even healthy? Is it a sign of PM’s place in the trough of the hype cycle? Is the current climate an opportunity for those left standing or someone new? Or does it simply suggest that prediction market proponents like me have lost?

A number of media-PM partnerships which on their face seem perfectly natural are history: USA Today+Newsfutures, Popular Science+HSX, Business 2.0+ConsensusPoint, Financial Times+Intrade, Techcrunch+Askmarkets [5], ABC7+Inkling [6], and CFO Magazine+Crowdcast.

At least two former PM companies found success only after switching gears: Protrade became Citizen Sports before being acquired by Yahoo! and Nigel euthanized Hubdub to focus on FanDuel. Cocision, launched just last fall, has already abandoned its PM roots in favor of breezy Q&A and voting.

Usable Marketeer Alex Kirtland nails exactly why all the “predict Wall Street” games may be fun but aren’t likely to be predictive. Research papers, including my own, report that the accuracy advantage of prediction markets, while real, may often be small compared to statistical models or polls.

Intrade, one of the most cited and well studied PMs, is trying hard with a radical remake that looks great and a new fee structure that’s likely to improve low-probability predictions. I don’t have any inside knowledge but the company and the exchange don’t seem especially strong; I even spotted some bugs in their exchange rules. The venerable Iowa Electronic Market and Foresight Exchange that, together with Robin, started it all, look, well, venerable. Betfair is still a powerhouse and soared in its IPO just last fall, but is perhaps showing signs of age as personnel turn over and the product remains decidedly 1.0.

A few startups like Crowdcast, MediaPredict, smarkets, betable, socialico/PremierX, and InklingMarkets are nimble and promising, but none have hit home runs yet. The SimExchange is well designed and chugging along. Bet2Give [7] and CentSports are both fascinating concepts and still alive, two of the most intriguing real-money markets. Others like ExtZy, RealityMarkets and PublicGyan are hanging on. New entrants like Prediculous, Predictalot, Predictopus, 4cast, beansight, I Called It, IBET, Prediction Book, HuffPo’s Predict the News, Slate’s Lean/Lock, Ultrinsic, Knew The News, Cantor Gaming’s Oracle [8], and the MNI Forecast Competition (Lumenogic) are still coming up, though at an admittedly slower pace than four years ago.

Update 2011/5/10: Crowdpark, a German company with an office in San Francisco, launched in English last December with a web game and an impressive, well-designed Facebook game that’s already attracted 500,000 monthly active users, the 11th fastest growing Facebook app in April. They have an interesting “patent pending” automated market maker that I can’t find any details about (yet).

One PM mailing list is of questionable transparency and another is often silent. The Prediction Market Industry Association is inactive.

The final post on Newfutures Blog in 2009 declares that “resistance is futile”. But is it the world’s resistance of PMs, or PMs resistance of irrelevance, that is futile?

Despite the negative tone of this post, I believe it’s the former. The prediction market spring will come. Here’s why. Prediction markets offer:

  1. Accountability
  2. Meritocracy
  3. A marketplace to reward information release
  4. Real-time updates
  5. Accuracy
  6. Increasing ease of use, as the technology matures and diffuses
  7. Self funding

No other prediction technology offers the same. There’s a great opportunity here for the companies that have squirreled away enough nuts to survive the winter.

P.S. Also read Paul Hewitt’s Prediction Market Prospects 2010.

Footnotes:

[1] In 2006, the teaser prediction for BizPredict was “Do you know when MySpace’s traffic will surpass Yahoo’s?”.

[2] Techcrunch declared Alexadex “the web 2.0 stock market”, back when Techcrunch encouraged Diggs

[3] I like Trendio’s post-mortem:

..Trendio rapidly became popular and attracted massive traffic from all over the world, as well as attention from major newspapers, TV-channels and blogs. To develop Trendio as a large-scale web property and an income-generating business would however have required to dedicate time and resources that I wasn’t able to provide.

I still believe there is a massive potential for prediction markets, both as games and for their predictive power…

[4] A truly sad loss, and not just because of the 2005 awards. Someone should archive the archive to be sure this gem, as information-rich as it was verbose and disorganized, survives. Hang in there Midas Oracle!

[5] Ironically, upon launch of Askmarkets in 2008 Techcrunch asked “who’s going to the deadpool?”

[6] Technically not dead, but seems neglected.

[7] We independently considered an idea similar to bet2give at Yahoo! in 2007 but never pursued it.

[8] Cantor Gaming’s odd-setting mechanism seems effectively like an automated market maker with intelligent prior.

16 thoughts on “It’s Arab Spring, but is it Prediction Market Winter?”

  2. smarkets is definitely one of the bright spots, thanks Jason. I like an analogy of Playstation versus Wii. Just like Wii opened up video gaming to a mass audience including women, I think there’s room for simpler/friendlier sites like smarkets that can open up gambling to a much wider audience than sites like betfair that seem to cater mostly to men familiar with gambling jargon.

  3. You guys are right and at some point a lot of money will be made on something like Predictalot or Smarkets, betting with casual, social networking hooks, but I think there is a nagging “incompleteness” in a lot of the original excitement behind prediction markets. Basically, for predicting important real-world events with human participants, either such markets will remain niche (though possibly with “real money” hedging value), or the markets will become big enough in the public conscience to influence the underlying events, in which case a single ugly incident can set the whole endeavor back, regardless of what long-run expectations are for pathologies.

    It will be a long time before the general public is receptive to such markets. The first iteration of Cantor Exchange has already, for no great reason, paid a price for the financial crisis. It is doubtful that Cantor would have been sniped down at the last moment if they had achieved the same CFTC milestones in 2006 or even early 2008.

    I wouldn’t be “short” prediction markets here either, but people are skeptical of markets in general, and the pitchforks will be out for a while. (As I wrote that I thought of the movie Young Frankenstein, for some reason)

  4. I think you’re right Jason that the climate isn’t ideal right now. Not to put too much faith into the unscientific Gartner hype cycle, but it does feel like a time of backlash responding to some early over optimism. As cooler heads prevail, and the technology speaks for itself, I think we’ll start to see some solid success stories.

  5. Great post Dave. You didn’t mention Simexchange (video game sales) I wonder if PM’s are a good method of forecasting consumption, and in what other verticals they can be applied.

    @Jason – I agree that real money is problematic for most markets as the underlying events will inevitably become influenced. I wonder if using an alternative currency (of increasing value and usability) such as reputation will enable large scale PM’s on real world events to grow.

  6. @Daniel, thanks. I did briefly mention simexchange buried in there: “The SimExchange is well designed and chugging along”, though should have included a link. Yes, consumption is one vertical where wisdom of crowds (of many flavors) seems to do fairly well.

    There is indeed an interesting tradeoff between real money and alternative currencies: with the former, manipulation of the event is a concern, with the latter manipulation of the market is a concern.

  10. Martin, thanks. You’re right, I wasn’t aware of CrowdPark. Wow. The facebook game looks great: nice interface/design, and great to see impressive activity. I’ll add it to the post above. Just curious: what kind of market maker algorithm are you using to set the odds/price?

  11. Hi David,

    Martin just pointed me to your post on our Crowdpark system http://blog.oddhead.com/2011/05/11/crowdpark-review/.

    We are indeed using the LMSR in the CROWDPARK facebook game, as you have pointed out. Our patent application, however, is for the business method of what we call “dynamic betting” – traditional betting with the possibility of cashing out the bet at its current value. So dynamic betting does not relate to any specific market maker – many market makers can be used in the dynamic betting framework.

    Our future games will probably not use LMSR anymore, rather some of our own linear algorithms.

    Congrats to your inventor cube! We hope to be following soon with our patent 🙂

    Regards,
    Alex

  12. Thanks Alex for confirmation. Much appreciated. Aha, great, thanks for the clarification about your patent. Is the application online? Thanks for the congrats and good luck to you as well, both for the patent and for Crowdpark: keep up the great work.

  15. Hi Marc. Sorry for the comment trouble. Thanks for the pointer. Impressive numbers for a short time period. Congrats. Sure, I’d be happy to chat.

  16. One hears that CrowdPark pretty much dropped Prediction Markets. They are now into Social Gaming.

    Oh well…there you go.

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