Prediction markets rock

I’ve recently discovered PPX, The Popular Science magazine’s prediction exchange. I’m hooked. Prediction markets are fascinating, enough to give any economist wet dreams. You can buy “stocks” in particular events, which pay out a fixed price if the event transpires before a certain date, or nothing at all if it does not. You effectively bet that an event will or will not occur (you can make money betting against an event through a market technique called selling short). The price of a stock represents the consensus probability that the event will occur. There are online prediction markets for political races, sporting events, technology events, movies, disease breakouts, world events, even the weather. Google uses a prediction market internally to predict launch dates and other strategic events.

The theory, which has been pretty well borne out in practice, is that while individuals may be so-so at making predictions, a large group of individuals with a motivation for accuracy can be a far better predictor. This is the wisdom of crowds at work.

PPX is a market for science and technology events. It doesn’t use real money, but pretend $POP, so the motivation is just to prove that your good and making predictions. Hot stocks at the moment relate to the iPhone, Apple’s market share, Facebook, Airbus’s A380 and robots playing soccer. I’m currently raking in the virtual dough betting that the iPhone will be hacked but won’t push Apple above a 10% share of the PC market, and that Transformers won’t top the box office this summer (well, my winter). My stakes that DRM will not die this year but the A380 will miss it’s October launch are not doing so well.

Perhaps the best thing about PPX for me, though, is how much it’s taught me about financial markets. For example, I had no idea what selling short was until recently. Unfortunately for my education PPX is somewhat limited (for example, you can’t open yourself up to infinite debt as you can by going short in a real-world market). But it’s still cool. I might play with a real-money prediction market when I have a bit of time. And I have ideas for other cool prediction markets now.

Here are some other prediction markets for you to check out:

- Iowa Electronic Markets, predicting presidential races more successfully than polls

- Intrade, politics, entertainment, finance and weather

- WeatherBill, bet on the weather (more of an insurance policy than a game)