the art & science of
FORECASTING
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tock and options traders are continually trying to predict the future. After all, every market decision boils down to the same question: “Will this or won’t this make money?” But not all markets are created equal. Investors and economists have had hundreds of years to study markets like the New York Stock Exchange, which was established in 1792. Other markets, such as event-contract prediction markets, are still in their infancy. It was only last July that Kalshi, the first-ever federally regulated events
“It’s hard for the human brain to think about the future, and we thought that using technology we can make it easier for us to transport ourselves to the future and imagine it better.” They picked the topic of climate change and recruited self-described believers and skeptics. The point was to see if participating in a climate-themed prediction market would shift beliefs because the market would serve as a non-partisan arbiter of truth. Following the experiment, some did change their beliefs, but not merely because they participated. Participants shifted toward stronger concern about climate change proportional to the amount of money they won, regardless of whether they were believers or skeptics. “The nuance is that giving you a stock that’s contrary to your beliefs that constantly makes money does change your mind,” Cerf said. “When you constantly get feedback that your stocks that go against your beliefs are making money, you get feedback that says your beliefs are not aligned with reality and it would have been more financially rewarding for you to have the other beliefs.” Then, gradually, you shift your beliefs without realizing it—even if your exchange, opened its identity doesn’t change. virtual doors for a public Climate skeptics who Making—or losing— began acting more like beta. Users are already trading hundreds of thoubelievers still identified money in prediction sands of shares in its largas skeptics, Cerf said, “So est-volume markets, each I think the shift is not markets can change share representing somecomplete—it is in pracbody’s expectation for the beliefs. But how does tice, but not in theory.” outcome of a future event. The experiment was repeated focusing on With more-established that work? prediction market platsports instead of climate forms, such as Predicchange, and the results by Mike Reddy tIt, it’s not uncommon suggested that fandom is for trading volume in a not as closely tied to one’s number of markets to surpass millions of shares. identity as environmental beliefs. It’s easier That was more than enough to catch the to accept a favorite team losing a game than attention of Moran Cerf, a neuroscientist being wrong about ideological principles. and business professor at Northwestern But for prediction markets to change University. He and his team decided to beliefs, Cerf said, participants must accept construct a prediction market for a research a common arbiter of truth. project—not to learn what the markets do, “It only works if when you lose, you accept but instead to find out what could be done that you lost, and if you win, you accept that with the markets. In practice, the project you won,” he said. “And in this game, you accomplished a bit of both. entered knowing the rules, and you got an “We thought that we can use technology to outcome that’s like going to trial. The jury change people’s minds,” Cerf told Luckbox. says ‘yes’ or ‘no.’”
MONEY OVER MIND
Prediction Markets AUGUR was developed by Forecast Foundation as a global no-limit decentralized prediction market platform built on the ethereum blockchain. BETFAIR, a London-based online gambling company, operates the world’s largest online betting exchange and hosts prediction markets on domestic and international politics. KALSHI, a new federally regulated prediction market based in the United States, began its beta in July 2021 with markets based on COVID-19, climate, politics and pop culture. NADEX (NORTH AMERICAN DERIVATIVES EXCHANGE), a regulated financial exchange, specializes in short-term binary options and spreads. It recently introduced a suite of prediction markets for forecasting economic events. POLYMARKET, a prediction market platform built on the Polygon blockchain, uses USD Coin (USDC), a cryptocurrency stablecoin, to make trades. PREDICTIT, a New Zealand-based prediction market, was launched as a research project in 2014 with a no-action letter from the Commodity Futures Trading Commission. It emphasizes politically themed markets.
January / February 2022 | Luckbox
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