Prediction markets. Are there any other two words that couple as nicely as those, at least to readers of this blog? The promise of a prediction market is simple and profound: if you ask a lot of people a question about politics or sports or Hollywood movies, and those people are motivated to answer it correctly, their collective judgment turns out to be fairly accurate. (James Surowiecki, Mr. Wisdom-of-the-Crowds himself, has a nice summary of the field in this week’s New Yorker.)
For many people, Intrade is the king of the prediction markets. (We have cited it several times on this blog.) It was co-founded in 1999 by John Delaney, an Irishman fond of cycling and mountain climbing, who had spent the previous decade in investment management. Intrade allows participants to trade on the likelihood of events ranging from national elections to global disasters, using actual money. The site now claims more than 50,000 users in 120 countries who submit hundreds of thousands of orders a day.
Delaney recently took the time to answer some questions for our blog. If you’ve got further questions for him, put them in the comments section, for Delaney has offered to submit to a second round of Q&A.
Q: Briefly, what is Intrade?
A: InTrade is a marketplace, just like eBay or the NYSE, that provides innovative markets to trade, and the best darn predictive information on uncertain future events bar none!
Q: How much money is traded on a daily/monthly/annual basis?
A: On an annual basis, hundreds of millions of US$.
Q: It’s easy to imagine that ambiguities in the wording of markets on your site could cause conflicts. Have there been disputes of this sort?
A: Yes, there have been disputes. We provide a public forum and when disputes arise they are often aired and can be fierce, something that is understandable where money is involved. But let’s put things in perspective. We list thousands of markets, over 50,000 markets in 2006, and in fewer than 5 occasions that I can recall have we ever had any significant disputes. We don’t always get things perfect, but we do try.
Let me give you an example. We listed a market on whether the U.S. Government would formally report that North Korea tested a missile in a certain manner. While the media reported that North Koreans did test a missile, it was not confirmed in an official U.S. Government release as was required in the market rules, so we settled the market according to the strict interpretation of the rules and not the understood intention of the market. This was understandably a real issue for some of our members and also for Intrade. It was a bad situation for everyone, really. We have learned from it.
Q. What has been the most surprising or unusual market you’ve listed?
A. I guess when we listed Saddam Hussein to be toppled back in 2002, it was what we consider a masterpiece market. While hundreds of other similar contracts have traded since, the “Saddam To Be Ousted” contract was a defining moment for our exchange and, we believe, the prediction market industry. Other interesting markets include the election of the Pope (the markets did not predict the winner) or Bin Laden being captured, which is currently trading.
Q. What’s the biggest profit that’s been made on a single market? What was the subject of the contract?
A. We don’t release specific figures but profits and losses can realistically exceed $1 million on some individual markets.
Q. Which markets are most popular? Do certain markets go in and out of fashion?
A. Political markets are most popular now thanks to the fascinating U.S. Presidential race. Our 2008 election markets are trading actively, while the issue of a North Korean despot causing a war or Israel attacking Iran is not as popular as it was previously. Interest in these contracts will resurge as related international events unfold. People trade or rely on market probabilities more when they are passionate about or focused on a particular issue. So there is a seasonal dynamic at play.
Q. In 2003, U.S. Admiral John Poindexter proposed that the Defense Advanced Research Projects Agency (DARPA) should initiate a prediction market as a forecasting tool for predicting geopolitical events in the Middle East. The idea was wildly unpopular in the U.S. press and elsewhere, viewed as a form of profiting from (or manipulating/initiating) terrorist acts. After a damaging Congressional audit of the DARPA Information Awareness Office, Poindexter retired. What are your thoughts on this?
A: We had a market on his departure, of course. His proposal was a great validation of prediction markets, but unfortunately poorly received. DARPA could have presented it better, but there were a number of folks with unclear motives, to me at least, that caused it to be shot down with no robust debate. That same mindset seems less prevalent today as more people use prediction markets; however, there is still a suspicion (or is it schizophrenia?) between various types of speculation.
Q. How does Intrade deal with insider trading?
A. Insider trading is one of the wicked problems, perhaps. Intrade is about providing the best predictive information. If insiders have information, then getting that information reflected in the market increases the quality of the information. I know this is not the conventional view concerning insider trading, and I am not arguing wholesale adoption or acceptance of insider trading. But we all know that, in the real world, insiders trade on inside information. We have even had markets on insider trading. Our view is to get the best information available into the market while we make sure there is some fair protection for outsiders.
Q: Is what you do legal in the countries from which you draw participants?
A: It’s very difficult for our legal folks to know the exact attitudes, laws, precedents etc. of every country, but they do try. This is a challenge for any global business, particularly one that supplies innovative services like Intrade.
Q: Where are you based?
A: Intrade is operated from Dublin, Ireland, where I am from, but I guess Intrade is based on the country-less Internet. Our prediction market operates under Irish and EU laws.
Q: Are you the sole owner of Intrade and its sister site Tradesports? Is the company currently private? If so, are there plans for an IPO?
A: Intrade is a private Irish company owned by its shareholders. We do not have any immediate plans for an IPO.