[extropy-chat] Re: Now Bush to win 1.5:1

[Robin Hanson]

At 07:45 AM 11/3/2004, you wrote:
>>Well the betting markets made a big reversal last night, ... this does at 
>>least raise
>>a small suspicion that theses markets were too volatile due to 
>>over-confidence.
>
>I don't follow. I don't get how you are thinking of "over-confidence".
>I'd have thought that efficient markets would be indifferent to
>"over-confidence".
>How could "over-confidence" have produced too much volatility?


If when the true probability is 20% you think 10%, when the true chance is 
40% you think 20%, when the true chance is 60% you think 80%, and when the 
true chance is 80% you think 90%, you are overconfident.   If the true 
chances followed a rational random walk, then your overconfidence chances 
would be too volatile.  If the prices reflected overconfident beliefs they 
would make a buy low sell high strategy profitable.

>Anyway, I have long thought that real money would make me and
>others a lot more serious about our predictions. I'd be very interested
>in a finding to the contrary as its SO counter-intuitive.
>Do you really think real and play money have come out the same?
>That would be extraordinary I think.

The few studies that have been done so far have found that.

--------------------------------------------------------------------------------------
Prediction Markets: Does Money Matter?

<http://www.ingenta.com/isis/browsing/AllIssues/ingenta;jsessionid=n5bvdupa0yc9.circus?journal=pubinfobike://routledg/rema>Electronic 
Markets 
<http://www.ingenta.com/isis/browsing/TOC/ingenta;jsessionid=n5bvdupa0yc9.circus?issue=infobike://routledg/rema/2004/00000014/00000003>September 
2004, vol. 14, no. 3,   pp. 243-251(9)

Emile Servan-Schreiber[1]; Justin Wolfers[2]; David M. Pennock[3]; Brian 
Galebach[4]

The accuracy of prediction markets has been documented both for markets 
based on real money and those based on play money. To test how much extra 
accuracy can be obtained by using real money versus play money, we set up a 
real-world online experiment pitting the predictions of TradeSports.com 
(real money) against those of NewsFutures.com (play money) regarding 
American Football outcomes during the 2003-2004 NFL season. As expected, 
both types of markets exhibited significant predictive powers, and 
remarkable performance compared to individual humans. But, perhaps 
surprisingly, the play-money markets performed as well as the real-money 
markets. We speculate that this result reflects two opposing forces: 
real-money markets may better motivate information discovery while 
play-money markets may yield more efficient information aggregation.
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Robin Hanson  rhanson at gmu.edu  http://hanson.gmu.edu
Assistant Professor of Economics, George Mason University
MSN 1D3, Carow Hall, Fairfax VA 22030-4444
703-993-2326  FAX: 703-993-2323