Prediction Markets at Yahoo

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Prediction Marketsat Yahoo!

• 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

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Prediction markets _at_ Y!
not to scale
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Prediction markets _at_ Y!
HSX
Design
Build
Analyze
NF
TS
WSEX
FX
PS
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Case Study I
Design

• Dynamic parimutuel
• Market maker
• Cross btw stock market and horse race betting

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Parimutuel market
1
1
1
1
1
1
1
1
1
1
1
1
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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
.4
C(3,8)8.5
.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
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Share-ratio price function

• One can view DPM as a market maker
• Cost Function
• Price Function
• Properties
• No arbitrage
• pricei/pricej qi/qj
• pricei
• payoff if right C(Qfinal)/qo 1

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http//buzz.research.yahoo.com

• Yahoo!,OReilly launched Buzz Game 3/05 _at_ETech
• Research testbed for investigating search futures
• Buy stock in hundreds of technologies
• Earn dividends based on actual search buzz
• API interface
• Exchange mechanism is new Yahoo!R inventionCross
  btw stock market and horse race betting

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http//buzz.research.yahoo.com
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Technology forecasts

• iPod phone

• Google Calendar
• Another Apple unveiling 10/12 iPod Video

price
searchbuzz
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Forecast Accuracy

• Average forecast error across 352 stocks

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Early Lessons Learned

• Forecasts point in right direction
• Market closing deadline focuses traders
• Dividend levels matter
• Intelligent strategies work
• Randomized bots lost money to real traders
• Contest winner followed optimal buzz trading
  strategy (prices ? ?buzz)Went from 4th to 1st
  place in final days
• Forecast error does decrease over time

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Analysis
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Trading uncertainty for collective wisdom
Business-value markets since 2002, as covered in

• Design Delivery Operations Analysis
• Highly Customized Solutions

Sample Customers
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Whats next?

• What the buzz game thinks will grow
• Web app framewks Ruby on Rails
• VOIP Skype
• Blinkx Desktop Search
• Blog Services WordPress
• AJAX frameworks scriptaculous
• Linux Ubuntu

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Case Study II
Design
Build
Analyze

• Yootopia Y!Internal economy for favors,
  predictions, grp decisions

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More
Design
Build
Analyze

• Betting mechanisms
• Combinatorics
• Infinite/continuous
• Linear programming backbone
• Market makers
• Applications

• Computational complexity
• Does money matter?
• Wisdom of crowds Combining experts

• IOU social network
• Ledger system
• Buzz Game Tech stock horse race