Predictive+Markets

Posted by: Sean Fields, Regina Safina, Ezra Nigussie, Amy Vukovich

· Why use predictive markets? People use the predictive market in purpose of making predictions. · How and why do they work? How? All markets are collective intelligence in action. Why? Diverse knowledge and diverse thinking styles · What are the two kinds of contracts? Binary contract:Pay out all or nothing Linear contract: pays out all final value · What are the two types of traders? Marginal traders: investors who make decisions regarding buy and sell trades with the use of fundamental data. Noise traders are investors who make decisions regarding buy and sell trades without the use of fundamental data. These investors generally have poor timing, following trends, and overreact to good and bad news. · What are potential threats to predictive markets?

· What are the two separate phenomena? Information is know by part of the crowd The crowd aggregates diverse thinking styles · How can the following groups of people be used in predictive markets? Advantages and disadvantages? o Target customers: Disadvantage: customers tend to make the interviewer feel good, link between stated and actual intention weak, people are imitators/ o Experts: Disadvantage: how we weight opinion by true expertise, and what if they got information from the same source? o Tapping employee ideas: Adv: can recognize the important information by listening to people who argues most eloquently. Disadvantages: group think and agree with the boss

· How are predictive markets used in forecasting new product demand? Survey target customers Ask a pool of experts · What are some behavior patterns? Dramatic reversals Manipulation: the act of artificially inflating or deflating the price of a security From the reading: · Types of internal markets? Examples?

· Advantages of an internal market system

Discussion questions: · How are predictive markets like the stock market? The markets are generally created around a specific topic or event, and contain the contracts which are traded

· Can you think of other real life uses of predictive markets besides those discussed in class and reading? Forex.com is the foreign exchange market which is decentralized over the counter financial market for the trading currency. The industry Standard's technology industry prediction market

· What is the difference between herd mentality and crowd madness? Herd mentality: when people hear the ideas and opinions of others, they often succumb to peer pressure rather than speaking their own mind Crowd madness: we tend to think of crowds of people as irrational mobs

· Compare our discussion of mirror neurons with the concept of wisdom of crowd.