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Prediction Markets Part II

Prediction Markets Part II. By: Meghan Danielson. Recap. Prediction markets are a tool for collecting group opinion using market principles. They are a way to bring together people’s opinions.

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Prediction Markets Part II

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  1. Prediction MarketsPart II By: Meghan Danielson

  2. Recap • Prediction markets are a tool for collecting group opinion using market principles. • They are a way to bring together people’s opinions. • Public opinions are expressed by buying and selling stocks that represent possible answers to a question being posed.

  3. Google • Google’s prediction markets were launched in April 2005 and are patterned after the Iowa Electronic Markets. • In Google’s terminology, a market asks a question (“How many users will Gmail have?”) that has 2‐5 possible mutually exclusive and completely exhaustive answers (“Fewer than X users”, “Between X and Y”, and “More than Y”). • Each answer corresponds to a security that is worth a unit of currency (called a “Gooble”) if the answer turns out to be correct (and zero otherwise).

  4. Google • Each quarter, about 25‐30 different markets were created. • Participants received a fresh endowment of Goobles which they could invest in securities. • The markets’ questions were designed so that they could all be resolved by the end of the quarter. • At the end of the quarter, Goobles were converted into raffle tickets and prizes were raffled off. • The prize budget was $10,000 per quarter, or about $25‐100 per active trader (depending on the number active in a particular quarter). • Participation was open to active employees and some contractors and vendors; out of 6,425 employees who had a prediction market account, 1,463 placed at least one trade.

  5. Google

  6. Google • Google works as a search engine because it collects information that is naturally dispersed across the web. • The internal prediction markets are based on the same principle: Googlers from across the company contribute knowledge and opinions that are collected into a forecast by the market. • In addition to making predictions, internal prediction can provide insight into how organizations process information.  • Prediction markets provide employees with incentives for truthful revelation and can capture changes in opinion at a much higher frequency than surveys, allowing one to track how information moves around an organization and how it responds to external events.

  7. Betting Market • A betting exchange is an entity which provides “trading” facilities for retail or bookmaker customers to buy and sell contracts. • Betting markets are used extensively in wagers made on horse racing and sports markets. • Also include elections and current event markets.

  8. Prediction vs. Betting Market • The United States bans online gambling in US based markets, so prediction markets are common and involve the use of “play” money. • Betting markets and spread betting are much higher risk and involve bets placed with real money, accounting for potentially large gains or losses.

  9. Spread Betting • The idea of spread betting was invented by Charles K. McNeil, a mathematics teacher from Connecticut who became a bookmaker in Chicago in the 1940s. • The idea became popular in the United Kingdom in the 1970s and 1980s.

  10. Spread Betting • Spread Betting officially came to the UK in 1974. • Stuart Wheeler, a young unemployed stock broker, had the idea to start people trading on gold prices. • This idea was to create an index that would give investors the opportunity to bet on the movement of gold, without having to actually buy or sell the physical commodity in the market. • Wheeler and friends called this company the Investors Gold Index - until the Bank of England objected to it trading under that name and it became IG Index. • The IG soon extended its product range to include foreign exchange and commodities.

  11. Spread Betting • Spread betting is defined as wagering on the outcome of an event. • The payoff is based on the accuracy of the wager, rather than on a simple “win or lose” outcome. • The spread is a range of outcomes, and the bet is whether the outcome will be above or below the spread • Purpose: to create an active market for both sides of a binary wager, even if the outcome of an event may appear to be biased to one side or the other.

  12. Spread Betting • There is almost always a favorite and an underdog in every sporting event. • The odds are too biased towards the favorite when bets are placed on a simple “Who will win?” wager. • Point spread is essentially a handicap towards the underdog. • With spread betting, the question now becomes, “Will the favorite win by more than the point spread?”

  13. Example • The bookmaker advertises a spread of 4 in a certain game. • If the gambler bets on the underdog, he will “take the points” and win if the underdog’s score PLUS the spread is greater than the favorite. • Underdog 8, Favorite 10: 8+4>10 … gambler wins • Underdog 8, Favorite 13: 8+4<10 … gambler loses • If the gambler bets on the favorite, he will “give the points and win if the favorite’s score MINUS the spread is greater than the underdog. • Underdog 5, Favorite 10: 10-4>5 … gambler wins • Underdog 8, Favorite 10: 10-4<8 … gambler loses

  14. Spread Betting • Bookmakers can move the point spread to any level to create and equal number of participants on each side of the wager. • As long as the total amount wagered on each side is roughly equal, bookmaker is unconcerned with actual outcome. • They profit from commissions. • Bookmaker also profits by paying one (or both sides) less than the amount collected from betters.

  15. Spread Betting • Push: when the final bet results in a tie. • This results in a “no action” game when no money is won or lost. • This is not favorable because the book ends up losing money on overhead costs. • Sports books are permitted to state “ties win” or “ties lose” to avoid refunding every bet.

  16. Spread Betting • Total over/under (or O/U): bet on the total number of points scored by both teams. • The total is popular because it allows gamblers to bet on their overall perception of the game (high-scoring offensive show or defensive battle) without needing to pick the actual winner.

  17. Example • Suppose the Chicago Bears are playing the Eagles and the total is set to 44.5 points. • If the final score is Bears 24, Eagles 17, the total is 41 and bettors who took the under will win. • If the final score is Bears 30, Eagles 31, then the total is 61 and bettors who took the over will win.

  18. Financial Spread Betting • Largest part of spread betting in the UK deals with financial instruments and financial markets. • Sports operations are much less significant and bring in less revenue. • Unlike fixed-odds betting, the amount won or lost can be potentially unlimited. • It is usually possible to negotiate limits with the bookmaker: • A stop lossor stopwill automatically close the bet if the spread moves against the gambler by a specified amount. • A stop win, limitor take profitwill close the bet when the spread moves in a gambler's favor by a specified amount.

  19. Dangers of Spread Betting • According to an article in The Times dated 10 April 2009 it is indicated that approximately 30,000 spread bet accounts were opened last year. • The largest study of gambling in the UK on behalf of the Gambling Commission found that serious problems developed in almost 15% of spread betters compared to 1% of other gambling. • A report from Cass Business School found that only 1 in 5 punters ends up a winner. • Although financial spread betting in the UK is regulated by the Financial Services Authority, spread betting companies provide little protection for those who run into trouble.

  20. Pros and Cons of Spread Betting PROS • One in the eye for the tax man. The money you make from spread betting is currently free from capital gains tax. Of course always be aware tax rules can change. • Pay as you go. By using spread betting all the costs are included in the spread. • No short changing. Investors can 'short' and make money when share prices. • The world is your oyster. Bets can be placed on a complete range of global markets and shares, sectors, commodities and currencies. You can back anything from Microsoft to metals. • Going up a gear. You can gear up or leverage your investment. In other words you only need to put down a fraction of the value of your trade or position. For spread betting if you bet say, £10 per penny movement this is equivalent to trading 1000 shares. In summary you get more bang for your buck. • This means that you can make more by putting down less money, but of course as always it is only fair to point out that you can also lose more. CONS • Emotion.Spread betting can be addictive and the unpredictability of market movements can produce feelings of panic, complacency, euphoria, dejection, infallibility and failure. • Losing streak. As you only have to put up a fraction of your total exposure, be aware that if things do turn against you, you can lose more than your original deposit. • Ignorance. Only fools rush in without understanding how to play the game. Unless you know how the system works and you have a carefully prepared plan for success, you will lose. • No get rich quick scheme. Yes, spread betting is a great and cost effective way to trade and take positions. If you make bad investment decisions, it doesn't matter what method you use to trade. Always do your research, and don't get carried away. • No perks of the job. You don't pick up the perks of actually owning the shares. For example you will miss out on gorging yourself on tea and chocolate biscuits at a company's annual meeting or getting to vote on shareholder issues. • To sum up, it is important to remember that not every trade is a winner. Any market matches buyers and sellers. If you are buying at a certain price, somebody is willing to sell. You can't both be right.

  21. Spread Betting Now • The spread betting industry has come a long way in the past 35 years. • Now a recognized and established investment outlet for individual traders to make tax free gains trading the stock market. • Many tools for trading that were previously only available to professional traders are now available to all. • Recent economic turmoil has pushed the financial markets into the mainstream more than ever before. • Banks failing, shares dropping, and the rise in the price of oil have resulted in shifts in all markets. This has made people more aware of the impact financial changes have on our lives. • People are also much more interested in taking control over their own finances. • This has helped the spread betting industry evolve, leaving investors and traders with more choice, more tools and more markets than ever before!

  22. Works Cited • http://static.googleusercontent.com/external_content/untrusted_dlcp/services.google.com/en/us/blog_resources/google_prediction_market_paper.pdf • http://googleblog.blogspot.com/2005/09/putting-crowd-wisdom-to-work.html • http://en.wikipedia.org/wiki/Spread_betting • http://www.financial-spread-betting.com/History-and-risk.html • http://www.financial-spread-betting.com/Spread-risks.html • http://www.ildado.com/sports_betting_glossary.html • http://www.timesonline.co.uk/tol/money/investment/article1305642.ece • http://www.dailyreckoning.co.uk/lessons-from-history/uk-gambling-market-a-good-investment.html

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