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Prediction Markets as a Tool of Crowdsourcing and Collective Intelligence Anton Kondratyuk,Knowledge | Innovation | Talent Witology
Brief informationKondratyuk Anton,WitologyMathematics and Computer Science, B. A., MSUFinancial Markets and Investment, M. A., HSE4 years experience in crowdsourcing, idea management andcollective intelligence technologies Witology | All rights reserved. 2
What is information aggregation?Information aggregation means gathering some kind of information from thesources that contain it with help of specific methods and tools.Crowdsourcing means using wide range of people (community) instead ofexperts/specialists for solving some specific task. Solution Information from the crowd People Witology | All rights reserved. 3
Principles of crowdsourcing• Decentralization (there’s no one source of information for participants)• Independence (people don’t influence each other)• Knowledge (participants are not specialists but they must have opinion about what they’re asked)• Diversity (participants must represent various points of view on a problem)• Motivation (to be sure they give all information they possess) Witology | All rights reserved. 4
Effects of crowdsourcing1. The more people take part, the better results we have.2. We don’t look for experts, we look for missed “chains” in a crowd (in information we get).3. The efficiency of average participant is not high BUT the overall efficiency is high. And every participant is much cheaper than any expert.4. It’s difficult to find really unique solutions inside group of experts who have definite view on the problem field. Witology | All rights reserved. 5
Prediction Marketsemulation of market activity, where future news are traded as assets. Witology | All rights reserved. 6
Prediction Marketsaggregate information in pricesexactly as stock markets do• It’s an instrument of future events prediction• Traders buy and sell stocks in outcomes of a definite event and in such a way push the price up/bring it down.• When a trader believes in some outcome of the given event, he buys; otherwise he sells. The amount of stock he chooses for a transaction depends on his confidence in the outcome.• So if there’s enough liquidity on the market current price is supposed to be an effective determinant of beliefs in this outcome of the event, weighted by amounts bought&sold.• BUT unlike stock exchange the price on prediction markets usually fluctuates between 0 and 100 and is interpreted as probability measured by traders.• Traders do what they always do – try to make successful deals according to information they have. Probability of the outcome is a “side” product of their activity but still the most valuable. Witology | All rights reserved. 7
Prediction Markets scheme Multi-outcome Binomial Barack Obama 60,7% Yes 60,7% Who will win Will Obama win presidential Mitt Romney 38,1% 100% presidential 100%elections 2012? elections 2012? No 38,1% Other candidate 1,9% Data source: Intrade.com Witology | All rights reserved. 8
Use and benefits of Prediction Marketsfor society, economics and business• Prediction Markets are used in all fields which are related to risk management and prediction-based decisions such as politics, economics, science, business and corporate finance• Predictions Markets make it possible to aggregate all the information possible at the moment• Market mechanism makes it possible to change prediction by any trader at any time according to information change. So it’s different from betting, polls, etc.• Prediction Markets give the whole picture of the probabilities of outcomes and, what is even better, the history of opinions change (information change)• Prediction Markets are stable to manipulation• It’s possible to draw tacit and inside information• The accuracy of Prediction Markets is proved to be better than other methods in not all but in many cases.• Effectiveness of virtual currency PM and real-money PM are similar• It’s a new way for measuring key business points by its own employeesWitology | All rights reserved. 9
Open questions about Prediction Markets (PM)• What scope they can be efficiently applied to?• There’s a problem of liquidity similar to real markets, so on small unpopular markets probabilities can show nothing• Law hindrances because in many countries PM are treated as gambling (in the USA the dispute is still on about permission on public real-money PM)• The accuracy of PM is worse for low (0-5%) and high (95-100%) probabilities• There’re some markets which can cause public protests (for example, US DARPA market on Osama bin Laden to be caught) Witology | All rights reserved. 10
Prediction markets examplesSocial markets:• Intrade (real-money)• iPredict• Iowa Electronic Markets (real-money with limit)• CantorExchangeCorporate vendors for PM:• ConsensusPoint• InklingMarketsCompanies using PM for business predictions:• Google• HP• GM• Pfizer Witology | All rights reserved. 11
Social TradingSocial trading is the process through which online financial investors rely mostly (or solely) onuser generated financial content gathered from various applications as the major informationsource for making financial trading decisions.Today the main application for social trading is using other investors’ transactions for makingown decision. It’s a way of “following” other traders to make the strategy as a combination ofother peoples strategies.So the main competence changes: instead of trying to use technical, fundamental and all othertype of information available traders try only to find investors whose style they like and chooseweights for them to use.There’re social trading networks:• eToro• Zecco• Zulutrade• Currensee Witology | All rights reserved. 12
Twitter predicts DJ indexIs it really possible?Some researches are already done which show correlation between mood state in Twitter and DowJones Industrial Average (DJIA). Moreover, some mood states can predict DJIA 1-3 days before.The most used mood tweet model by now is GPOMS which includes definite mood states such as:• Sure• Happy• Calm• Vital• Alert• KindOne really useful state from this set is “calm”. Lagged 2-6 days normalized changes in values showstrong prediction power with DJIA, with accuracy as high as 87,6%. Included into DJIA predictionmodels this variable can improve them dramatically.There are papers that research connection between US indexes and sentiment of twitter-basedcommunity. Results prove that common fear, worry, indifference on the given date can predictindexes change the next date. Witology | All rights reserved. 13
The most famous correlationDJIA vs normalized “Calm” value• Period shown is 28 February, 2008 to 3 November. 2008• Despite high correlation twitter “calm” value can’t predict some important economic events such as large bank bailout which still have much influence on the market• The origin of this correlation is still not clear Witology | All rights reserved. 14