Twenty years ago, the first prediction market was used for the 1988 presidential election. It was run by the University of Iowa. Today, with the Internet enabling a critical mass of players and opinions to predict an outcome, a plethora of prediction markets, or idea exchange, startups have emerged, from Hubdub, NewsFutures, Spigit, Inkling, and InTrade.
If the prediction markets are accurate, Barack Obama will be the next President of the United States. On Hubdub, a prediction market launched in January of this year, McCain leads over Obama. If I bet $100 Hubdub dollars on McCain to win, and he wins, I win $349 Hubdub dollars. If I bet $100 Hubdub dollars on Obama winning, and he wins, I win $144. On InTrade, another prediction markets company, Obama leads over McCain - 63% vs. 31%.
The theory behind such markets, much like IEM (Iowa Electronic Markets), is that voters don't choose who they think will win, but rather who they want to win. In political polls, people are asked, "Who would you vote for?" In markets, people are asked, "Who do you think will win?" Essentially, markets encourage participants to take a greater stake in the outcome.
"In the market, the focus of the traders is to maximize
the play money," said Nigel Eccles, co-founder and Chief News Junkie of Hubdub. "Why do you want to do that? You want to
be on the leaderboard; you want to compete with your friends: you want
to be right." (See documents in NewsFutures' profile for analysis on whether play money is a real incentive.)
Prediction markets are "speculative markets created for the purpose of making predictions," according to Wikipedia. According to Inkling Markets, a white-label provider of prediction markets, "the term market is used because possible answers to a question are
represented as stocks. If you think an answer is correct, you buy stock
in it. If you think it is incorrect, you sell. People buying and
selling shares makes the stock prices go up and down."
In an MSNBC article, author Alan Boyle points out that predictive markets are performing better than the polls. In the piece, it says: "This year, the Caveat Bettor blog compared InTrade's predictive powers against the Zogby polls, and last month InTrade was declared the winner with a record of 7-3 vs. Zogby's 3-7 (plus 11 state-by-state "ties"). The result was "unsurprising to those who know a little bit about the scholarship, economics and/or track record of prediction markets."
Hype or better?
It's not clear that all prediction markets are the best way to predict an outcome. For example, one accurate forecasting tool to find out who'll win American Idol, is DialIdol, which predicts the outcome of American Idol based on busy signals. Recently, on DialIdol, David Cook was predicted to win over David Archulet. And, NYTimes columnist Paul Krugman pointed out that Intrade wasn't at all right about Hillary vs. Barack. His title: Nobody knows anything, says it all.
But no matter, people love to trade and make predictions. In fact, trading and betting - regardless of what it's on - is so addictive that on Hubdub, the average pageview of an active user is 450 pages, said Nigel. Now, that seems pretty high given that the number of pageviews per user on social networks, like Facebook is north of 100. And, social networks are pretty sticky.
Hubdub, which raised $200,000 in seed funding, is seeking to raise another round of $1 million. Will they get it? I'm betting on it. What do you think? Place your bet on Hubdub.