Ed Saclayan

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Prediction Markets

• Ed Saclayan
• Abe Jeter

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Efficient Market Hypothesis (EMH)

• The Efficient Market Hypothesis is the
  proposition that financial security markets are
  informationally efficient i.e., the current
  price incorporates all information known
  currently concerning factors in the future which
  may affect the price of a stock.

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What are prediction markets?

• -Markets where participants trade in contracts
  whose payoffs depend on unknown future events
• -Predict the likely occurrence of various future
  events

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Three types of contracts

• Winner takes all
• Index
• Spread

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What is the premise for prediction markets?

• Wisdom of the crowd
• All of us know more than any of us
• Collective group is better than individual
  experts
• Using the power of markets to provide info about
  probabilities of the future

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Prediction markets

• Tradesports.com
• Goldman Sachs
• Deutsche Bank
• Chicago Mercantile Exchange
• Newsfutures
• Foresight Exchange
• (ideosphere.com)
• Hollywood Stock Exchange
• Iowa Electronic Markets

Virtual currency
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Who uses prediction markets?

• Business
• Pharmaceutical companies- new drugs
• Hewlett-Packard- sales forecasting
• Dentsu-consumer trends advertising demand
• Military
• Geopolitical events
• Terrorism targets
• 2004 Election

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Iowa Electronic Markets

• Proven results of accurate predictions
• Consensus view
• Agree
• Disagree

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What is the goal of prediction markets?

• Reduction of uncertainty and
• Information for decision making

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What is in the future?

• More human freedom in business
• Emphasis on group knowledge
• P.M. are only part of the trend
• New management
• No longer about command and control

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Questions????
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Review Questions

• Prediction markets are used by some businesses
  to identify successful products or predict sales
  revenue.
• TRUE FALSE

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References

• www.forbes.com/2004/09/30/cx_da_0930topnews_print.
  html (accessed 11/20/04)
• www.usnews.com/usnews/biztech/articles/040830/30fo
  recast_3.htm (accessed 11/20/04)
• www.bpp.wharton.upenn.edu/jwolfers/Press/SIEPR20p
  olicy20brief.htm (accessed 11/20/04)
• Kohn, M. Financial Institutions and Markets
  Second Edition Types of Futures Contract pg.473