pageok
pageok
pageok
Michael Abramowicz, Guest-Blogging:

I'm delighted to welcome George Washington Prof. Michael Abramowicz, who will be guest-blogging about his new book Predictocracy: Market Mechanisms for Private and Public Decision Making, being released this week by the Yale University Press. (Michael and I were briefly colleagues, when he was a lawprof at George Mason, and I was visiting there for a semester.)

Michael's book argues that prediction markets should be widely employed in decision making, because -- when properly designed -- they tend to provide a good algorithm for aggregating different points of view into a single forecast. A decisionmaking institution would be better off using this algorithm than relying on individual decisionmakers to develop their own forecasts, whether explicitly or implicitly.

At its most ambitious, the book defends what Michael calls "normative markets," in which the forecast is of a normative assessment by a decision maker to be randomly selected from a group. Sometimes, he argues, it might be better to rely on a forecast of the decision of a single randomly selected member of a group, rather than on an actual decision of all or a subset of the group members.

Michael will start by addressing some common objections to prediction markets and by outlining their institutional advantages. He'll then offer some of his ideas both for innovative designs and applications of prediction markets. And, finally, he'll explain and defend the broader theory behind normative markets. I'm very much looking forward to seeing Michael's posts.

Daniel Chapman (mail):
Not that I've read the book, but if prediction markets were used to make actual decisions instead of as a guessing mechanism, wouldn't the prediction markets become self-fulfilling prophecies?

I would have loved to go in and buy every share of "Superbowl - Packers to win" on tradesports, running the price up to 99.9% if I knew I would be causing the packers to win by doing so.

The fact that they might be wrong is what makes them work.
1.28.2008 7:30am
Wayne Jarvis:
D.C. I'm not sure I understand your analogy.

Prediction markets help you understand what the odds are. I don't care what you do, you should always base your decision making on the odds. If you go against the odds, you should have a good reason for doing so. It doesn't mean that you will always be correct, but if you consistently play by the odds, in the long run you will always be better off.

Anyone who has played 21 can tell you that the house always wins in the long run (unless you are counting cards) but if you play by the (rather simple) odds you will be better off in the long run.

Markets, as I understand them, are just a tool that helps you understand the odds. The idea is that a market will give you a better and more complete picture of the odds of any given outcome than a highly-trained or committee of experts. It doesn't mean that the market will always be correct, but for most endeavors you don't need to be right 100% of the time.
1.28.2008 10:00am
OrinKerr:
Welcome, Michael!
1.28.2008 10:20am
OrinKerr:
Welcome, Michael!
1.28.2008 10:20am
Ilya Somin:
Welcome! I look forward to your posts.
1.28.2008 1:43pm
Daniel Chapman (mail):
Not that anyone's still reading this post, but my point is that prediction markets are a guessing game... if the actual event in question is based on the results of the prediction market, then... shouldn't I be able to "create" the outcome I want by committing enough resources to swaying the market? Does it cease to become a guessing game based on incomplete information spread across thousands of actors and become a "vote" of some sort that determines the outcome?

My analogy to the superbowl was that the prediction market at tradesports.com gave the packers about a 15% chance of winning the superbowl. Obviously it's absurd to think that I could have actually affected the outcome by buying up shares until it became 99.9%. Is it any less absurd to apply the same logic to supreme court nominations? Election results? Legislation?
1.28.2008 8:14pm
Michael Abramowicz (mail):

Daniel -- These are good questions. One possible approach is to use "conditional markets" to affect decisions. Essentially, the market corresponding to the contingency that doesn't occur is canceled. I address some of the issues related to having conditional markets that determine which course of action to take here.
1.29.2008 9:44am