Resources & Tutorials
What Are Prediction Markets?
Prediction markets, also known as "information markets" or "ideas futures", are a decision support tool that allows you to receive answers on questions related to future events.The closest comparable tool is of course surveys. But, and this is a very big "but", there are very significant differences between prediction markets and traditional surveys, which allow you to get more accurate results in less time and effort.
What Is A Market?
In prediction markets, you take a question and make it into a market.In our tutorial we will use one recurrent example:
"Which of the following products will generate more revenue for our company on 2009?"
At Qmarkets, we refer to 'Markets' as 'Questions', in order to simplify things (along this tutorial, you'll see us switching between the 'market' and 'question' terms, but basically they mean the same).
Now, this question has multiple choices for answers, so let's simplify it, and start with an easier case:
"Will our company product X sell more than a Million units next year?" (we will continue to multiple choice questions later).
Any question on prediction markets behaves much like a stock in the stock market (or more exactly - like an option).
However - it is much simpler than it sounds, so bear with us...
At any point, the question has a value between 0 and 100, representing the probability that product X will sell enough units:
- 0% - people participating in this market/question believe this product has a zero probability to sell enough.
- 100% - people are positive that this product is a killer product
- 43% - product X has a 43% chance to sell enough units.
When you set up the question, you give it an initial value, representing the initial probability. To make it simple, initial value will be 50 - i.e., a 50% chance that this product will sell enough units.
Now you invite people to participate in your question - employees, customers, external consultants or field experts.
For argument sake, you give them fictive money (or points) to play with.
For instance, every user gets a 1,000 points to participate (or "trade") in your question.
The Market In Action - Prices, Selling & Buying
People coming to participate in your question, see the question you asked, and the current probability.They have two options -
- If they think that the product has a better chance of selling than the current probability - they choose to "Buy" a stock at the given value (price).
- If they think chances are lower, they choose to "Sell" a stock at the given price.
Based on their level of certainty, they choose how much of their fictive money they are willing to use.
Now - let's say I came in to participate in your market, and current value (probability=price) is 23%.
I think chances are really higher, since I've been talking to customers about this product and hearing they really need it. So I "Buy".
I am very sure about this, so i buy 10 units/stocks (and not just 1).
Each stock costs 23 points, so this will cost me 10 X 23 = 230 points (out of the 1,000 points I received when joining).
During this process of buying, value of the market will automatically increase in 1-2 points, depending on how many stocks I bought (How does this work? See more details later regarding trading alternatives in prediction markets).
On the following week, CNN broadcasts a story expressing the demand in the market for such a product, which makes his chances to sell much higher.
I am not the only one thinking that, so many people come in and "buy", and so the probability that the product will succeed according to the market rises. After a few days, it reaches 40%!
But, after a few weeks, I participate in a conference, where I see many more companies plan to develop the exact same product
I still think it is a good product, but now I doubt our company can sell more than a million units.
So I go back to the question, which is now at 42%, and decide to "Sell" my 10 stocks.
As a result, I get 10 X 42 = 420 points.
During this process, I earned 420 - 230 = 190 points - that's my earning.
Next ==> What Happens If I Don't Sell?