On Predictive Markets
I recently read an article about intrade, a company that lets you buy and sell contracts on future events. In other words, if I think that event X will happen by some date, I buy a contract on it from someone who thinks that it won’t happen. If I’m right, I get money, if I’m wrong, the seller gets money. Yes, this is gambling, although intrade takes a commission instead of acting as the ‘house.’ This is also an example of a predictive market, which, some people claim, is a mechanism for aggregating the collective intelligence of crowds. Google’s doing it, as was the Pentagon until they came to their senses.
In some sense, I agree that markets have astonishing predictive power, but on the other hand, it is a myth that you can’t beat the market. Day traders can and do make money from the stock market, and this fact indicates that there are at least fluctuations in the accuracy of market predictions. The predictions are biased by human whim and fancy. However, B.K. Marcus (via Dean’s World) makes a strong case for the increased predictive power of funded markets. If the market is funded, it’s price will (hopefully) reflect the sum of people’s self-interested research. People profit if they do good research. He writes:
“The magic of market mechanisms goes well beyond the creation of consensus from a decentralized distribution of local, implicit, sometimes unconscious knowledge — the power of the market lies in its ability to harness the power of self-interest.”
That gives intrade a boost over some of the free, fantasy markets such as Foresight Exchange and Yahoo’s Tech Buzz Game. I’m going to keep an eye on intrade, and maybe even try it.