The Oscars and prediction markets

Now that the work of childbirth is behind me, I can get back to writing about the world of technology and the many changes going on around us.

By now you know that Argo was the big winner in tonight’s Oscar’s, meeting the predictions made before the event and proving once again the power of new forms of analytics. The best predictions didn’t come from pundits but instead from prediction markets, described by economist David Rothschild as follows:

Prediction markets are markets where knowledgeable users can back up their convictions over upcoming events with either real money or other meaningful rewards. Contracts on the outcomes of events are worth either a dollar if outcome occurs or nothing if does not occur; thus, the price of the contract is a strong indicator of the probability of it occurring. If the price for a contract that could be worth a dollar crosses 90 cents, users are very confident the outcome will occur, but if the same contract trades for pennies, users are very confident it will not occur. Users trade on many types of information and the markets are an efficient way of aggregating this dispersed information among dispersed users.

This is a fascinating way to predict outcomes where there is a enough underlying data to build fundamental models that not only predict but also help us see which variables matter the most. For the Academy Awards, Rothschild points to movie grosses in week five versus week four as a key indicator. Who knew?

It appears the people who knew were the ones who also knew this same approach would work for politics, including the 2012 U.S. Presidential election, albeit without extensive polling data prior to the big event. It will be fascinating to see where these ideas get applied next.