Prediction Markets

Case: Coles, Peter, Lakhani, Karim and McAfee, Andrew, “Prediction Markets at Google” Harvard Business School Case No. 9-607-088, August 20, 2007 Case preparation: “Prediction Markets”, February 2016

Textbook Reading: Chapter 4 (Section 4.5; pp. 127-134)

For more about the management failure that led to the Challenger disaster, see:

• “Remembering Roger Boisjoly: He Tried To Stop Shuttle Challenger Launch“, Howard Berkes, npr, February 6th 2012

Here is a New York Post article explaining how Nancy Pelosi (and her husband) have benefitted from trading off the stocks of companies that she regulates, and why she is resisting efforts to stop Congressional lawmakers from being able to continue to do so. You can track her trades here. Here is a funny halloween costume.

Here are a couple of op-eds on the benefits of insider trading:

• “Don’t regulate banking – liberalise it“, by Anthony J. Evans, Guardian Unlimited, September 14th 2009
• “Learning to Love Insider Trading” by Donald Boudreaux, Wall Street Journal, October 24th 2009
• “Insider trading enriches and informs us, and could prevent scandals. Legalize it“, by Dylan Matthews, July 26th 2013

I am Facebook friends with someone who used to work at Google – here’s a photo of one of the T-shirts:

The Google case was published in 2007 and was accompanied by a lot of interest in prediction markets. In 2021 they launched a new internal prediction market because of two main reasons:

1. Even more Google employees (i.e. a bigger crowd)
2. Better technology in the form of Google cloud

To read more about the “Policy Analysis Market” (PAM) which was designed by Robin Hanson as a tool for the US Department of Defense, but got cancelled in July 29th 2003 having been described as a “terrorism futures market” by the Washington Post, see:

• “Pentagon kills ‘terror futures market’” by John W. Schoen, NBC News, July 29th 2003
• Hanson, R., The Policy Analysis Market A Thwarted Experiment in the Use of Prediction Markets for Public Policy 

Here are some examples of prediction market software:

• Polymarket
• Kalshi
• Prediki

The Climate Risk and Uncertainty Collective Intelligence Aggregation Laboratory (CRUCIAL) uses prediction markets to learn more about future climate related challenges. See:

• Roulston, M., Kaplan, T., Day, B. et al. Prediction-market innovations can improve climate-risk forecasts. Nat. Clim. Chang. 12, 879–880 (2022)

Recommended reading

• • Manne, H.G., 2005, “Insider trading: Hayek, virtual markets, and the dog that did not bark”, Journal of Corporation Law 31(1):167-185 – A defense of insider trading from the perspective of internal markets and corporate information flows
  • Prediction Markets in Theory and Practice, Justin Wolfers and Eric Zitzewitz, NBER Working Papers, March 2006
  • “Using Prediction Markets to Track Information Flows:  Evidence from Google” Bo Cowgill, Justin Wolfers and Eric Zitzewitz, January 2008
  • Dye, Renee, “The promise of prediction markets: a roundtable” McKinsey Quarterly, 2008 – An executive discussion on the benefits of prediction markets and how to implement them.
  • The Promise of Prediction Markets, Policy Forum, May 2008

 

Recommended video

Recommended audio

• “Why There Aren’t So Many Hotel Fires Anymore” Stuff You Should Know. This podcast is relevant because the key technologies that they identify are fire doors, sprinklers, and alarms that anyone can set off. Imagine how many major hotel fires would occur if staff had to wait to inform senior management before receiving authorisation to call the fire brigade.

Learning Objectives: Understand how to operate a prediction market.

• Category: course map