Subject: Re: idea futures markets (was Re: Tom W. Bell paper)
From: <stephen@xemacs.org>
Date: Wed, 6 Sep 2006 19:15:55 +0900

Ben Tilly writes:

A lot of good stuff, probably more intelligibly than I did.

 > > 2. Knowledgeable speculators will adjust the payoffs of innovations so
 > >    that less-likely innovations have higher payoffs.

 > There really won't be that many knowledgable speculators.  The ratio
 > of profits to be made from the speculation to the knowledge needed to
 > do so is not very good.

However, there don't need to be.  The current theory (of the guys at
Stanford Biz) is that prediction markets work well by aggregating lots
of not very well-informed opinions, plus a few "knowledgeable"
speculators.  Why it is that these markets do a significantly better
job than individual experts, and typically at least as good as the
average of the experts, is not clear.  Perhaps it's a kind of
investment-weighted "ultra-wide-band Delphi" method.  Anyway,
Zitzewitz et al propose "How do we get 'enough' uninformed investors
in the market?" as one of their "Five Open Questions about Prediction
Markets".  (The paper is cited in Bell's, I don't have the URL
offhand, sorry.)  A shortage of informed investors doesn't seem to be
considered to be a problem. :-)

This emphasizes the danger of chasing out everybody but the insiders.

Steve