This is the first post on the Wisdom Hive blog, so we’re going to take the opportunity to set out just what we’re doing and why this blog exists.
What is Wisdom Hive?
That’s a good question and, at the moment, the answer is: ‘an idea’. But that’s not very specific, so let’s elaborate a bit: Wisdom Hive is a prediction market system in development. We’re aiming to build the best prediction market system there is - the biggest, strongest, quickest and smartest prediction market in the world. Well, there’s no point in aiming low, is there?
Hold on, what’s a ‘prediction market’?
Wikipedia provides this basic definition:
Prediction markets are speculative markets created for the purpose of making predictions
Not especially enlightening. In a bit more detail, a prediction market is just like any other market (it might help to think of a stock market). Various assets (known as contracts) are traded at the prices that individual participants are willing to buy and sell at. Prices go up or down depending on sentiment, or what people are prepared to pay, a figure which changes over time. The contracts traded on prediction markets are based on outcomes, which are ultimately only worth anything if the predicted outcome occurs. A simple example should suffice:
Let’s imagine that you think that Barack Obama will win the 2008 US Presidential election. You will want to buy a contract which says “I will pay you 100 currency units if Barack Obama wins the US Presidental election in 2008″; in fact, you might want to buy several such contracts because, if you’re right, you get a payout for each one! On the flipside, if you’re wrong, you get nothing.
So, just how sure are you that Obama will win? Well, it seems that the majority agree with you, so contracts for this outcome are fairly expensive: 70 units. If he wins, you’ve paid 70 for the contract and receive 100 as specified, giving you a profit of 30. All of the people who thought that the outcome would be different lose their money (it should be pointed out here that we’re not talking about the money you get in your pay-check; this is strictly play-money).
Perhaps you think that risking 70 units for a potential profit of 30 is too risky. You think Obama will win, but you’re not that sure. That’s OK, you don’t have to trade on markets that look like the prices are already high for your favoured outcome. Perhaps you can find a better chance for a profit trading in a different contract.
Every trade that takes place moves the price a little bit. People buying contracts will drive the price of those contracts up, and people selling them will reduce the price. At all times, these prices will reflect what the market’s participants are thinking. If the price on an Obama victory contract is 60 and the price on a McCain victory contract is 40, that means that the market has assigned a 60% likelihood to Obama winning, and 40% to McCain. (There are lots of different ways of writing this - percentages, decimals, bookmaker-style odds - but we’ll stick with simple out-of-100 percentages).
Why is this interesting?
It’s interesting because these predictions, despite being made up of the prejudices, speculations and hunches of a whole bunch of difference people who have never even spoken to each other and might not be experts on what they’re trading in, are often pretty accurate. More accurate, in fact, than the best individual guess of any of the participants. This is the effect which has come to be known as the “Wisdom of Crowds” (and if you’ve never read the book of the same name, we highly recommend it). It turns out that markets are a great way of getting people to express their opinion without having to explain it to anyone. You might have any one of millions of reasons for thinking that something will or will not happen, and you use your insights to get ahead in the market. But every time you do this, you move the price a bit. And all of these little adjustments to the price by different people with different insights combine to create a prediction which can have astonishing accuracy.
Cool, but isn’t this old news?
The book mentioned earlier was published in 2004 and, since then, there has been a huge growth in the number of prediction markets online. The first ones were, of course, around long before then (the first ‘pure’ prediction exchange is the Iowa Electronic Markets, which began life in 1988). So, it’s reasonable to ask: why create a new prediction market system now?
The first answer is simple: we think it’ll be a fun project. We’re unashamed about finding the idea of programming a system to run prediction markets to be an enjoyable way to spend our time. The second answer is probably more interesting to the wider world: because we want to create something that is fun to use, reliable, successful and generally helps to advance the spread of knowledge and understanding around the world (remember when we said that there’s no point in aiming low? We really meant it).
Who is ‘we’, anyway?
We - the Wisdom Hive development team - are Rob Knight and Andreas Jacobsen. For more information about us, click on our names to view our personal websites.
When will it be ready?
When it’s done! Seriously, at the moment we don’t have any deadlines, launch dates or schedules. We’re working this out from first principles, evaluating technologies and approaches and generally throwing ideas around to see what works. We’ll be making prototypes and code available as soon as we have something worth sharing. If you’re interested in hearing about this when it happens, there’s a box at the top of the page where you can leave us your e-mail address. And don’t worry, we’re too busy with other things to be spamming you five times a day!
In conclusion, we’re looking forward to getting down to some serious development over the next few months and have high hopes of what we might achieve. And if our wildest ambitions aren’t fully realised, we’ll still have a lot of fun and a lot of interesting new knowledge from the process.