Category Archives: prediction markets

Predictive search

Recorded Future is a start-up service that looks at patterns in recent events to predict what will really happen in the future — for instance, assessing Apple’s sequence of past product updates to predict when the next generation of the iPhone will be unveiled with new features. The service locks most goodies behind paywalls, but you can visit to see which Senate candidates have the most momentum in the upcoming U.S. elections. Quants have been playing this game on Wall Street for decades; it’s about time someone told you which company will expand in India in 2014.

This isn’t exactly a prediction market, that is, a group of individuals whose average guesses can tell you uncanny things about the future (see our BusinessWeek riff on this back in 2008). And we’re not sure how good Recorded Future is at turning trend lines into future targets. But it does seem a natural extension of modern search rankings, which have moved from content links in Google to personal recommendations from Facebook, Twitter and other social media. If search relevance is to become any more relevant, we’ll have to know not only what we want today, but also tomorrow.

Via The New Shelton Wet/Dry.

Blame flannel shirts on Wall Street and Narcissus

To understand the current flannel fashion, let’s walk over to Wall Street and Greek mythology. First up, market psychology. There’s a saying that investors don’t pick stocks based on what they think will happen (if you believe Google shares will rise in value, you buy them) or even what they think others predict will happen (if you think others think Google’s stock will go up, that will drive up prices, so you buy it). Instead, market investors are three steps removed — if you think everyone else believes that others think the stock will go up, then you buy the stock. We guess about others’ desires to stay ahead.

Self-reflection starts with vanity

And everyone’s desires are tied to Narcissus. As Geoffrey Miller recounts in the brilliant “Spent,” Narcissus was the handsome Greek lad who spurned the wood nymph Echo because he fell in love with his own reflection in a pool. (He drowned and turned into a flower or something, which is why you hear echos in lake valleys. Really.) Miller suggests that most humans consume goods we don’t need because we have bits of narcissim in our psychology: the craving of others’ admiration. This is why people buy fancy leather jackets or watches or purses. You probably already have ways to stay warm in the rain, tell time, or carry cosmetics, but we crave new things because they signal our value to others.

Which is all tied to sex, of course, because if others don’t find you attractive, you don’t breed and your genes die. You, dear friend, are alive today because your caveman and cavewoman ancestors wore sexy pelts that turned each other on. Signaling status, intelligence, and creativity also pulls communities around you, useful if you need a collection of spears to fight off a stampede of mammoths.

Prediction + need = trends

These two drives — needing to signal to others and predicting how others will see our signals tomorrow — explain most of fashion. We constantly adjust our self-projections to stay ahead of what others will crave. The only way for your sperm or eggs to beat your competitors’ is to outthink their game. Which brings us around to flannel shirts. Have you seen the damned things are back in style?

Image: American Eagle Outfitters web site.

The McCain tax-cut video

The latest TV spot from John McCain takes a different approach than Obama’s tax-cut calculator. Instead of any specific numbers, McCain lists several broad actions to stimulate the economy: cut taxes, reduce government spending, drill for oil in America, rebuild consumer savings, and create new jobs. It’s noteworthy that the background images evoke the White House.

The approach avoids specifics (as in Obama’s “95 percent of Americans” claim) to convey a simple, presidential brand. We’d say this will score well among business owners and conservative blue-collar types looking for a traditional presidential figure. With prediction markets giving Obama an 87.5% chance of winning the election, McCain has returned to his core.

If group intelligence works, why do we get Rick Astley?

Spend any time on the internet and you may get Rickrolled, a little trick where you click on a link that you think will take you to something meaningful and instead get a cloying 1987 pop music video. This silliness is a form of internet meme, or an idea that spreads rapidly from person to person with no clear motive or source.

We began wondering how such group consciousness takes off after being Rickrolled on the consulting blog of Mark Pesce, a genius who has forecasted changes in human intelligence resulting from our internetworked behavior. (In a clever twist, above, Mark fakes with Rick Astley, then shows photos of ALL the people he is connected to online, including us!) Mark notes that 11 million years of evolution have given humans big brains, but the “software” that allows us to use our tools typically lags generations behind the “hardware.” For instance, we had the intellect to develop civilizations for thousands of generations … so why are roads and public water and printing presses such recent inventions?

Mark makes this point because today we are witnessing a new form of tools, a hyperconnectivity that puts cell phone networks in the hands of more than 3 billion people. Each day the business and tech press writes about “breakthroughs” in technology, marginal increases in tool use such as Facebook or the iPhone or Twitter, but the real innovation of our new networks is yet to be discovered — and may take generations.

The trippiest idea may be that vast groups of people merge into a higher form of collective intelligence, a hive mind that can predict future outcomes. We riffed on this a bit today in BusinessWeek, and think it has applications for both human governance and — at a tactical level — predicting marketing outcomes. Companies such as Google and Yahoo have run prediction markets to ask employees to place bets on which new products will succeed. Microsoft has asked its employees to bet when software will be ready for testing, or even when bugs will be found and fixed.

Prediction markets work because groups of people, when they bet for personal gain, make tiny judgments that average out to clear foresight about the future. Ask 100 people how many marbles are in a jar, and the average of all guesses will be close to reality. Collective bets could predict future scenarios. Will the bailout bill fix the economy? Will your next marketing initiative succeed or fail? Rather than using focus groups or executive judgment, the best source may be to ask an entire marketplace. You’ll either get a new form of brilliant intelligence, or a link to a silly Rick Astley video.

Prediction markets do have a major logic flaw, as noted by our Twitter colleague Bud Gibson. If such markets really can predict the future, observers will note this … and then try to change the future itself. If McCain’s camp sees Obama’s odds of success are pulling ahead, does this mean McCain is more likely to make aggressive moves to try to regain his momentum? The most interesting thing about future predictions is that if we can really do it, we might not like the future we see.

If you are interested in prediction markets, here are a few worth exploring:

Hollywood Stock Exchange — which movies will succeed at the box office?
Iowa Electronic Markets — real-money futures on who will win the U.S. presidency. Don’t miss the latest McCain vs. Obama “winner take all” prediction graph or detailed price chart.
Intrade — predictions on elections, current events, science and technology.
The Popular Science Predictions Exchange — bets on when technology gadgets will do this or that.
The now-defunct Policy Analysis Market, an attempt by the U.S. government to use group market intelligence to predict when bad things might happen around the world. The concept was quashed following controversy over allowing people to bet on when terrorism might strike or world leaders would be assassinated.

Prediction markets push McCain further down

Sen. McCain, meet artificial intelligence.

We’re researching a larger piece about prediction markets and it occurs to us that they provide a form of collective intelligence. Such markets — where thousands of people place bets on the outcome of the future — have remarkable accuracy. The Iowa Electronic Markets have predicted the outcome of the past presidential elections since 1988 with only 1.33% variance from aggregate results.

As of midnight last night, McCain’s odds of “winning it all” fell to 23.5% on the IEM exchange. The red line in the graph above shows the declining GOP fortune, tied to the economic tailspin. Bets are on the final mile of this election will get virulent.

Speaking of falling markets, McCain’s odds are now 29.5%

If you haven’t read The Wisdom of Crowds by James Surowiecki, all you need to know is that groups of people can be pretty accurate in their guesses. Ask a room of 100 people how many marbles are in a jar and every individual will miss, but average all the collective estimates and you’ll be right on the money.

One huge impartial group is guessing McCain’s odds of winning the presidency are now less than 30%.

The Iowa Electronic Markets is a prediction market experiment in which thousands of real people bet small sums of money on the outcomes of things such as the U.S. presidential election — and for years has achieved remarkable success. The idea is similar to betting on a horse race; the demand of people picking winners sets a price for the two horses, and those “odds” come extremely close to the actual outcome … since the group intelligence of all betters ends up predicting the real odds.

The IEM expresses odds in cents on the dollar, similar to percentage. After the bailout debacle yesterday, McCain’s odds in the “winner takes all” betting pool fell 17% from a recent high of 47 cents on Sept. 12 to 29.5 cents at midnight last night — or a 29.5% predicted chance of winning the election vs. Obama’s 70.3%. It’s noteworthy that these bets are not political opinions; they are the wisdom of people trying to make a profit by predicting the real outcome, which makes the guesses extremely accurate. Also note that this is not a guess on what percent of the voters will go for each candidate (which is much closer), but a “winner takes all” prediction on who, Obama or McCain, will win the entire election.

Crazy times. A lot could happen. Play this forward and you know that both Obama’s and McCain’s camps, who watch this type of thing, will be preparing bold chess moves to try to secure/dislodge the momentum. But bookmark IEM if you want to keep an eye on what the free market thinks about the U.S. political process.