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Designing Prediction Markets: Insights from Yahoo! Economics and Betting Mechanisms

This study explores the design and analysis of prediction markets, focusing on innovative applications within microeconomics, such as those developed at Yahoo!. It examines dynamic parimutuel market mechanisms that bridge stock markets and horse race betting, employing combinatorial strategies and linear programming. Key properties, like no-arbitrage and price determination, are highlighted along with case studies that illustrate practical implementations. The research emphasizes collective decision-making and the wisdom of crowds, providing a comprehensive understanding of market dynamics.

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Designing Prediction Markets: Insights from Yahoo! Economics and Betting Mechanisms

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  1. David Pennock Yiling Chen, Tej Kasturi, Havi Hoffman, Dan Reeves Chao-Hsien Chu, Sandip Debnath, Mike Dooley, Rael Dornfest,Joan Fiegenbaum, Gary Flake, Lance Fortnow, Brian Galebach,Lee Giles, Joe Kilian, Steve Lawrence, Bernard Mangold, Tracy Mullen, Rahul Sami, Emile Servan-Schreiber, Michael Wellman, Justin Wolfers Prediction Marketsat Yahoo!

  2. microeconomics predictionmarkets Prediction markets @ Y! *not to scale

  3. Prediction markets @ Y! HSX Design Build Analyze NF TS WSEX FX PS

  4. Dynamic parimutuel Market maker Cross btw stock market and horse race betting Build Analyze Case Study I Design

  5. Parimutuel market 1 1 1 1 1 1 1 1 1 1 1 1

  6. Share-ratio cost function: • C(q1,q2)=q12+q22 • Properties • No arbitrage • pricei/pricej = qi/qj • pricei < $1 • payoff if right = C/qo > $1 Dynamic parimutuel market C(1,2)=2.2 .82 C(2,3)=3.6 .78 C(2,2)=2.8 .59 .87 .3 C(2,4)=4.5 C(3,8)=8.5 .4 .91 .49 .94 C(4,8)=8.9 C(2,5)=5.4 .96 C(5,8)=9.4 0.97 C(2,6)=6.3 C(2,7)=7.3 C(2,8)=8.2

  7. http://buzz.research.yahoo.com

  8. Analysis

  9. Yootopia: Y!Internal economy for favors, predictions, grp decisions Case Study II Design Build Analyze

  10. Betting mechanisms Combinatorics Infinite/continuous Linear programming backbone Market makers Applications More Design Build Analyze • IOU social network • Ledger system • Buzz Game: Tech stock horse race • Computational complexity • Does money matter? • Wisdom of crowds: Combining experts

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