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REMARKS AT YAHOO! CONFAB ON PREDICTION MARKETSPer request, below is a rough transcript of remarks at Yahoo!'s Prediction Market Confab based on my speaking notes. The remarks were delivered on December 13, 2006. Thank you for having me. Today I'm going to be talking about how prediction market operators can best encourage participation. I don't think that rewards -- even cash rewards -- are adequate to induce participation. Market operators should instead focus on social rewards and the infrastructure and processes to deliver them.
In the classic view of prediction markets, financial self-interest drives participation. In this view, confidentiality is a good thing because it allows unpopular views to be heard. Lastly, the information coming from this market comes entirely in the form of prices and prices only.
I'd like to take issue with all of these points, and then propose solutions. First, it isn't as easy to drive participation using economic self-interest as one might think. There are several reasons why prizes do not motivate people to participate, even when you're using cash prizes.
The first reason is complexity and uncertainty. To avoid regulation as gambling, prediction market operators have created complicated payoff mechanisms that are difficult for players to understand. Payoffs often depend not only on whether the user has made correct predictions, but also on how other players bid and how many other players participate at all. This makes it difficult for players to understand how they will be rewarded.
The larger reason is that expected payoffs are low. Suppose a company has a $40K cash reward for the winner among 1000 participants -- a bigger reward scheme than anything I've seen in the real world. Even with these incentives, I doubt how well this would motivate participation.
Without knowing more about how well you will perform against others, the expected value is about $40. For the markets to work best, traders must be constantly engaged. They must be updating the markets as new information arrives. Is $40 enough to encourage that type of monitoring if you're a busy, well-paid professional making over $100K annually? I don't think it is. And in reality, the odds are often worse.
As a side note, I don't think the same psychological dynamics would apply if people could use their own money. That's not the world we're living in, though. So I believe the answer is in rewarding participants with some form of reputation system.
A reputation-based rewards system should involve a prominent leader board for participants in the market -- ideally displayed on company's intranet homepage. Perhaps there can be several different categories of winners. Each employee's listing in the company directory should include his or her ranking or holdings in the system.
Data from an HR database could show participants which teams, job functions or management levels are performing best in the markets. This would not only help market liquidity, but also foster camaraderie among teams. Management should bestow additional public honors to the best traders as well.
In a large company, a reputation system will encounter problems. It is hard for employees to care about their ranking if it is in the thousands -- even if they are ranked relatively high. The market software should allow users to define a group of peers for comparison purposes. Employees might choose friends, co-workers, people who started with them or anyone else they compare themselves with. The software could pre-populate this list with people in the employees' team, department, starting class or frequent meeting or email contacts.
In addition, the market should provide each player his or her own profile page -- complete with picture and introduction -- where his or her best trades can be displayed. Confidentiality in prediction markets is overrated. It prevents traders from sharing their insights and using the market as a badge of their insight.
How often inside corporations do you hear some variant of 'I told you so?' Even more often, people are thinking it and aren't saying it. There is demand among employees to take credit for accurate predictions on particular projects. To drive participation, market operators need to give employees the tools the need to share their predictions.
Future generations of corporate prediction markets should make confidentiality optional and disclosure by default. One hybrid way of gaining the benefits of both confidentiality and openness is: Create an option by which trades are confidential until the market closes, at which time money-earning shares are displayed. This would allow traders to share their accomplishments without creating copycat traders while the markets are open. With some imagination, there are other ways that copycat trading could be prevented.
Being able to see who bet how could make the markets more interesting to watch and participate in. In addition to sharing the financial dimensions of trades, the market should allow traders to append an explanation. This, too, should be shared on a voluntary basis. It would show the world that the trader's fortune was the result of genuine insight and not fortuitous happenstance.
Adding trade explanations would also help make the market more useful from management's perspective. Without explanations for trades, it is hard for managers to have faith in what the market is saying. To make explaining as easy as possible, traders could be shown a list of reasons that other traders or observers have already submitted. Rather than typing a new explanation, they could select an existing explanation (or set of explanations) to attach to their orders.
I would like to end on a story that I think demonstrates the superiority of a reputation-based rewards system. This year, the World Cup finals happened right on the edge of the Second and Third Quarters of 2006. So that we could keep these markets open a long time, we included the World Cup in the Second Quarter contest. We left these markets open about a week into Q3, and promptly closed them and opened Q3 markets as soon as the World Cup was over.
As a result, people didn't have much time to see their final rankings. Emails came pouring in asking to see their final ranks and about who would get a T-shirt. Because of other demands on my time, I didn't get around to identifying the T-shirt winners until later, but in the meantime emails were pouring in. When I finally sent out the winners email, I accidentally forgot to announce who won our seven large cash prizes. Not a single person noticed. In the meantime, the emails continued coming in about when the shirts would be delivered.
A few weeks later, someone finally wrote in. "You said my rank was below 20, but I didn't get a shirt," the person said. Upon investigation, I learned that I removed this person from the shirt list because he also won the cash prize. I realized I hadn't identified the cash prize winners. The only reason I even knew about it was because of someone's concern about shirts!
Next, I again became caught up in other work and didn't deliver the cash prizes for almost a month later -- and nobody spoke a word in the meantime. The point is that the traders didn't seem to care about the cash prizes at all. Instead, people wanted to know about reputational prizes -- their ranking in the system and the shirts that would identify them as winners.
Thank you very much, and if you have more questions we can talk during the break.
Published April 9, 2007.
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Disclaimer: Opinions expressed on this site are the author's and not necessarily his employer's.
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