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Google’s prediction markets

Chris Masse sent these links: Using Prediction Markets to Track Information Flows: Evidence from Google, by Cowgill, Wolfers, and Zitzewitz, and a news article by Noam Cohen. Here’s the abstract of the Cowgill et al. paper:

In the last 2.5 years, Google has conducted the largest corporate experiment with prediction markets we are aware of. In this paper, we illustrate how markets can be used to study how an organization processes information. We document a number of biases in Google’s markets, most notably an optimistic bias. Newly hired employees are on the optimistic side of these markets, and optimistic biases are significantly more pronounced on days when Google stock is appreciating. We find strong correlations in trading for those who sit within a few feet of one another; social networks and work relationships also play a secondary explanatory role. The results are interesting in light of recent research on the role of optimism in entrepreneurial firms, as well as recent work on the importance of geographical and social proximity in explaining information flows in firms and markets.

I love this sort of thing. In grad school I remember we talked about setting up a “betting board” where people could put up slips of papers with proposed bets, and then you could accept a bet by signing it with your name. We never did anything with it, and the technology is better now… The Cowgill et al. paper is interesting in how they go beyond the usual “prediction markets are cool” story to look into what information is really being used in the market.

P.S. I gotta say, though: Think harder about your tabular presentations! Do you really care that a certain coefficient is estimated at -0.188 with a standard error of 0.072??? It would be great if the younger economists, working on cool projects like this, could take the lead on graphical presentation–which, after all, is all about getting more information out of your analyses.

P.P.S. In his news article, Cohen writes:

A question never addressed in the report is what would seemingly be most interesting to an outsider: Do prediction markets work? Unlike surveys, the markets rely on something, I think the technical term is … oh, yeah, greed, to get their results.

Ask me who I think will win a baseball game, an election and an Oscar, and I can try to be objective, but I can’t help being influenced by who I would like to see win. (The Yankees, Fred Thompson, Pee-wee Herman; or is it the Yankees, Pee-wee Herman, Fred Thompson?) Put $5 on it, however, and suddenly I am willing to use all the information I have at my disposal to come up with the best answer.

The attribution to “greed” seems naive to me. I’d be interested to hear the comments of Justin Wolfers or Robin Hanson or others who have thought more about these issues. I agree that a $5 bet can (for some people) induce some sincerity, but I wouldn’t call that “greed”–unless they’re paying New York Times reporters a lot less than I think, $5 seems below the “greed” threshold. Rather, I’d say that the $5 represents some signal that it’s appropriate to take it seriously.

Also, not to keep going on about polls and forecasts, but (most) political polls are not set up to ask the question of “who will win” but rather the question of who would you like to see win. The point of the poll is to ask respondents something that they know about and is of general interest–in this case, their views on the issues, which candidate they support, etc. The voters–the general voting population–are the people who determine who wins the election, which is quite a bit different from the “Yankees” and “Pee-Wee Herman” examples given in the news article. (Yes, I know he’s just being amusing, but I think there is a serious underlying point, which is that elections are not just something that people predict, they’re also something that we jointly decide with our votes.)

4 Comments

  1. Fair call that the tables aren't (yet) super-readable. But we are working on trying to communicate the ideas more clearly. For an example of a graphic that communicates our ideas a bit better, see: http://www.portfolio.com/views/blogs/odd-numbers/

  2. Robin Hanson says:

    Yes prediction markets are cool, Google is cool, and it is cool that Google had location data to show how location influences trading. But cool need not be useful. People are not asking the hard questions here: what value exactly is Google getting out of these markets, aside from helping them look cool?

  3. Andrew says:

    Robin,

    Good point. Although I don't care so much if Google gets anything out of this; as a spectator I'm more interested in coolness.

  4. Ato Chiffre says:

    Coolness for the sake of coolnes is fine; until the entire prediction market industry goes belly
    up…which I fear it will.

    Hanson, is right ..the hard questions are not being asked, or, if they are, they are being suppressed.

    At this moment in time, prediction markets are a toy, a gimmick, that have made no inroads towards overthrowing corporate recipes.

    Moreover, those that operate in the "betting sphere" are essentially illiquid, inefficient and in the main pointless. They are badly marketed, misrepresented and in the main, the playthings off a bunch of guys with more money than sense.