A bump in the road for prediction markets

My friends over at Tradesports are catching some heat. Tradesports is an online prediction market that allows you to make bets on all sorts of unusual outcomes.

A controversy is brewing, though, over the outcome of a contract on whether North Korea would have a missile launch before July 31. Reading the newspapers, you might think that North Korea did a test missile launch, but the folks at Tradesports, based on the specific wording of the contract, decided that the launch that took place did not qualify. You can read about the controversy at Chris Maase’s website and in SmartMoney magazine. The SmartMoney article has a nice discussion of why these prediction markets might ultimately prove to be more important than just a way for gamblers like me to have some fun.

According to the SmartMoney article the controversy boils down to the following:

One of the contract’s rules is that “the source used to confirm a test missile being launched and leaving North Korean airspace will be the U.S. Department of Defense.”

The problem is that, according to Tradesports spokesman Matt Bonner, they made “numerous efforts to receive direct confirmation from the DoD” but were told “no statement involving the missile test and North Korean airspace would be forthcoming, as those specifics are considered a matter of national intelligence/security.”

Bonner emphasized that “a confirmation source is, by definition and necessity, an integral part of the proposition on which contracts trade” – and said that traders are “obligated to be familiar with the rules of a contract before they place an order.”

I have no strong opinion on the outcome — I think it is a tricky call. There are a couple of points that this controversy raises in my mind:

1) Tradesports has no direct stake in the outcome. Unlike a bookie, they don’t take a position. They just create contracts and provide a place for people to trade against other people. This is important, because Tradesports has no incentive to make the wrong choice for their own profits. You want the person deciding whether a contract won or lost to be indifferent to the outcome, and Tradesports is. The contract terms may have turned out to be the “wrong” ones ex post in the sense that the contract didn’t match public perception. But these markets are in their infancy and will improve with time.

2) There is nothing like creating a group of people with direct financial interests to create and stir controversy. I have been contacted by at least five different people who lost money on this Tradesports decision. I can’t think of another issue not directly related to Freakonomics or one of our columns that has spontaneously led so many people to independently write me.

3) I am unable to find out exactly how many contracts were outstanding on July 6, the day that North Korea fired the missiles. I don’t think the total dollars at risk were very large — maybe only $10,000 or less. If I were Tradesports, I would go back to that data and just go ahead and payoff both side to generate goodwill, good publicity, and make future traders confident that in the case of future controversy their interests will be handled fairly.

As for me, I’ll stick to betting on the really important current events, like who will win American Idol.

TAGS:

Leave A Comment

Comments are moderated and generally will be posted if they are on-topic and not abusive.

 

COMMENTS: 34

View All Comments »
  1. Hello professor Steve Levitt,

    Thanks for airing this controversy. You’re brave.

    I’d like to say to your readers that very few scholars have dared expressing their viewpoint publicly, because scholars need the data coming from TradeSports (and BetFair) to feed their research and publications. They fear retaliation from TradeSports (which has already retaliated agaisnt me for airing this dispute).

    As you said perfectly, this issue is complex and there’s no clear cut. As I wrote, all opinions are respectable (expire to 0, expire to 100, unwind all trades and void all bets, or pay both sides).

    That said, one thing bothers me a lot: How TradeSports treated its customers.

    The intent of the contract was whether NK would launch missiles. It became whether the US DOD would confirm the NK missile launches after July the 4th, but that was not wanted originally by TradeSports.

    Which is why TradeSports apologized to its customers and promised to carry some reforms.
    http://www.tradesports.com/aav2/news/news_58.html

    The problem is that TradeSports apologized and promised to reform, but they did nothing to compensate the victims.

    What’s problematic with TradeSports is that their customers can not complain anywhere. As you know, TradeSports is illegal in the U.S. And contrary to Betfair, TS is not a member of an independent arbitration service.
    http://www.ibas-uk.com/

    And TradeSports is not regulated in Ireland, contrary to BetFair, which is regulated in the U.K.
    http://www.gamblingcommission.gov.uk/

    So if you’re a disgruntled traders (mostly U.S. residents, where TradeSports is illegal), where do you complain? Not to the US courts. Not to trade associations. The only people who will listen are some sportsbook guide, where TradeSports has just been downgraded to C+.
    http://www.sportsbookreview.com/Search/default.aspx?Search=tradesports&Area=Site&Submit=Home

    This situation is very sad, and I hope that TEN CEO John Delaney will come forward to make the necessary reforms to TradeSports / InTrade.

    Thanks.

    Thumb up 0 Thumb down 0
  2. Hello professor Steve Levitt,

    Thanks for airing this controversy. You’re brave.

    I’d like to say to your readers that very few scholars have dared expressing their viewpoint publicly, because scholars need the data coming from TradeSports (and BetFair) to feed their research and publications. They fear retaliation from TradeSports (which has already retaliated agaisnt me for airing this dispute).

    As you said perfectly, this issue is complex and there’s no clear cut. As I wrote, all opinions are respectable (expire to 0, expire to 100, unwind all trades and void all bets, or pay both sides).

    That said, one thing bothers me a lot: How TradeSports treated its customers.

    The intent of the contract was whether NK would launch missiles. It became whether the US DOD would confirm the NK missile launches after July the 4th, but that was not wanted originally by TradeSports.

    Which is why TradeSports apologized to its customers and promised to carry some reforms.
    http://www.tradesports.com/aav2/news/news_58.html

    The problem is that TradeSports apologized and promised to reform, but they did nothing to compensate the victims.

    What’s problematic with TradeSports is that their customers can not complain anywhere. As you know, TradeSports is illegal in the U.S. And contrary to Betfair, TS is not a member of an independent arbitration service.
    http://www.ibas-uk.com/

    And TradeSports is not regulated in Ireland, contrary to BetFair, which is regulated in the U.K.
    http://www.gamblingcommission.gov.uk/

    So if you’re a disgruntled traders (mostly U.S. residents, where TradeSports is illegal), where do you complain? Not to the US courts. Not to trade associations. The only people who will listen are some sportsbook guide, where TradeSports has just been downgraded to C+.
    http://www.sportsbookreview.com/Search/default.aspx?Search=tradesports&Area=Site&Submit=Home

    This situation is very sad, and I hope that TEN CEO John Delaney will come forward to make the necessary reforms to TradeSports / InTrade.

    Thanks.

    Thumb up 0 Thumb down 0
  3. Kirit says:

    To me it seems that they did the right thing.

    By paying off both sides would they not increase the ‘moral risk’ of kicking up a storm on a controversy. If the contract is clear and their ruling is fair based on that contract they would set an awful precedent by paying both sides.

    It seems to me that paying off both sides would not only cost them money this time, but also involve them in litigation on every decision that could be challanged. In the end this would eat away at their goodwill.

    By sticking to the terms of their contract they’re saying that they will do this in all situations thus making people take proper notice of the contracts and in the long term engender a feeling of trust that what people sign up for is what they get.

    This to me seems a better long term proposition.

    Thumb up 0 Thumb down 0
  4. Kirit says:

    To me it seems that they did the right thing.

    By paying off both sides would they not increase the ‘moral risk’ of kicking up a storm on a controversy. If the contract is clear and their ruling is fair based on that contract they would set an awful precedent by paying both sides.

    It seems to me that paying off both sides would not only cost them money this time, but also involve them in litigation on every decision that could be challanged. In the end this would eat away at their goodwill.

    By sticking to the terms of their contract they’re saying that they will do this in all situations thus making people take proper notice of the contracts and in the long term engender a feeling of trust that what people sign up for is what they get.

    This to me seems a better long term proposition.

    Thumb up 0 Thumb down 0
  5. pkimelma says:

    It seems to me that they should have refunded the money to all bettors. Their ‘race’ did not take place since the arbitor/judge did not show up (so to speak). That is, if you bet on something and the outcome is not judged by the sanctioning or judging body, then it did not happen at all. So, they should just refund the money and make more of an effort to find someone who will authoritatively determine the outcome.

    Thumb up 0 Thumb down 0
  6. pkimelma says:

    It seems to me that they should have refunded the money to all bettors. Their ‘race’ did not take place since the arbitor/judge did not show up (so to speak). That is, if you bet on something and the outcome is not judged by the sanctioning or judging body, then it did not happen at all. So, they should just refund the money and make more of an effort to find someone who will authoritatively determine the outcome.

    Thumb up 0 Thumb down 0
  7. caveatBettor says:

    Kirit:

    I respect your thoughtful views, but in following your proposition, we win the battle of contract enforcement, and lose the war of credibility of predictive information markets.

    I invite you to check this out at your convenience http://caveatbettor.blogspot.com/2006/08/north-korea-contract-update-department.html

    Thumb up 0 Thumb down 0
  8. caveatBettor says:

    Kirit:

    I respect your thoughtful views, but in following your proposition, we win the battle of contract enforcement, and lose the war of credibility of predictive information markets.

    I invite you to check this out at your convenience http://caveatbettor.blogspot.com/2006/08/north-korea-contract-update-department.html

    Thumb up 0 Thumb down 0