Understanding Prediction Markets

For some time now, there has been a debate about how useful Prediction Markets can be.  Some will say that the odds reflected on prediction markets have to be incorrect, otherwise how would anyone, myself included make a profit? They will use examples of where the price on Intrade differed from what actually happened and use it as proof that prediction markets are inaccurate.  Likewise, proponents of prediction markets will use examples of “successful” predictions made by the market as evidence that they are more accurate then other forecasting tools such as polls and expert opinions from the media.  Both these arguments are incorrect. 

Prediction Markets are useful because they usually reflect the current odds of an event happening, at that current time, all other things being equal.  For example, Tiger Woods currently has an 80% chance of returning to the PGA tour by the end of April.  Would it be an incorrect prediction if Tiger Woods does not actually come back?  No.  Like all things about the future, there is some uncertainty.  Even the high price that Tiger Woods is currently trading at tells you that all is not certain.  A lightning bolt could strike and kill him on the golf course, his wife could change her mind and forbid him to play at last minute. There is still a 1 in 5 chance of him not coming back.  As anyone who has played poker can tell you, a 20% chance of being beaten on the river will happen from time to time. 

The usefulness of prediction markets comes from the aggregation of information into a price/probability that the brain can easily understand and interpret.  This is why Intrade and prediction markets can be useful. Sometimes the odds will not be accurate, but the point is there is an incentive to change the price if it does not reflect the current odds of an event in the future.  Prices on Intrade are valuable pieces of information by themselves, but they must all be taken with a grain of salt.  The future is uncertain. No one can tell you with any certainty what is or isn’t going to happen.  That is why those who seek out information, think rationally, and trade logically will profit.

Box Office Tracking for the Weekend of March 12-14, 2010

Four movies coming out this weekend, none of which look to beat Alice in Wonderland’s 2nd weekend.

Movie	MTC	RS
Green Zone	$17 Million	$17.5 Million (High Teens)
She’s Out of My League	$10 Million	$12.5 Million (Low Teens)
Remember Me	$7 Million	$5 Million (Mid Single Digits)
Our Family Wedding	$10 Million	$12.5 Million (Low Double Digits)

Weekend Box Office Analysis – Alice in Wonderland & Brooklyn’s Finest

Well, this weekend went pretty well with the Oscars and the Box Office this weekend. Even I was surprised by the huge Opening Weekend by Alice in Wonderland. The model seems to do better then average when predicting movies over $50 Million but seems to have a harder time with movies that gross less than $15 Million. Not a bad thing considering that movies that open larger on Opening Weekend are usually the ones that are traded the most. Here are the results of my predictions for the past two weekends.

Movie	Prediction	Actual	Absolute (%) Difference
Alice in Wonderland	$98.14 Million	$116,101,023	18.30%
Brooklyn’s Finest	$9.72 Million	$13,350,299	37.35%
--	--	Opening Weekend Average	27.83%

For the Weekend of February 26-28, 2010.

Movie	Prediction	Actual	Absolute (%) Difference
Crazies	$17.09 Million	$16,067,552	5.98%
Cop Out	$25.88 Million	$18,211,126	29.63%
--	--	Opening Weekend Average	17.81%

Year to Date, I have made predictions for 22 movies on Opening Weekend acquiring an Average Absolute (%) Difference of 19.20%.

Box Office Predictions & Bets – Alice in Wonderland & Brooklyn’s Finest

This weekend Tim Burton’s Alice in Wonderland looks to crush the Box Office. It’s got the Disney label, Johnny Depp, 3D, good buzz on the internet with twitter and internet ticket sales that are on fire. Fandango reported yesterday that Alice in Wonderland represents 88% of all sales. Last week it was already at 33%. The last movie to have internet sales like that was Avatar. Alice in Wonderland also seems to be at more locations and screens nationwide.

For Alice in Wonderland I have 10 contracts going long at $80 Million at 52.6% and 10 contracts going long at $90 Million for 35% over at the Intrade Prediction Market. No bets on Intertops this weekend.

Movie	Opening Weekend Prediction
Alice in Wonderland	$98.14 Million
Brooklyn’s Finest	$9.72 Million

My Thoughts and Bets for the 2010 Oscars

The Oscars have finally come around and unfortunately there seem to be few good betting opportunities due to how favored some of the contestants are.  I have bet in only two events, Best Picture and Best Actress. 

For Best Actress, Sandra Bullock seems to be the favorite and should be considering she has won many awards, and more importantly the Screen Actors Guild  award. The SAG being the biggest and most important constituency of voters in the Academy.  I have 15 Contracts going Long on Sandra Bullock at 60%. 

For Best Picture, the new preferential ballot presents challenges to successfully predicting the winner but I am convinced that Avatar has little to no chance.  The only big award that Avatar has won for Best Picture was the Golden Globe and that is voted on by a bunch of foreign journalists.  The Academy is mix of players inside the Hollywood Industry, a giant mix of all the Guilds. 

In the course of my research for Best Picture, I was able to find an online poll using the preferential ballot taking votes from a number of online forums.  There were 151 ballots from a mix of forums, with Avatar not even coming in 3rd.  Considering this was an online ballot from users on the Internet, I was surprised to see Avatar do so poorly.  If Avatar can’t win an online poll, how can it expect to win the Oscar for Best Picture?

Inglourious Basterds was actually the winner of the poll and beat the Hurt Locker.   Could this not also happen at the Academy? I know the poll isn’t scientific but I think it illustrates how Inglourious Basterds might be extremely undervalued right now.  One Oscar pundit certainly believes so and considering Inglourious Basterds won the SAG award for Best Ensemble, I think it has a good chance of winning the Oscar for Best Picture. 

I have 100 Contracts going Long on Inglourious Basterds at 6%.  I have decided to hedge this bet by getting 20 contracts going long for the Hurt Locker at 54.6%.

Box Office Tracking – Alice in Wonderland and Brooklyn’s Finest

Alice in Wonderland is surprising me a lot. I was expecting a weekend around $50 Million+ for the new Tim Burton flick but now it looks like it is heading into $75 Million+ territory. Brooklyn’s Finest seems to be getting completely overshadowed and ignored. Breaking $10 Million for the weekend would be beating expectations.

Movie	MTC	RS
Alice in Wonderland	$88 Million	$75 Million (Mid-70’s)
Brooklyn’s Finest	$8 Million	$5 Million (Mid-Single Digits

The Cantor Exchange

As some of you have already heard, this April 20th, the same people that run the Hollywood Stock Exchange will open the Cantor Exchange, a real money trading site for box office grosses trading in America.  In the last couple of months I have become a member of both the HSX and the CE.  I never really took HSX seriously until talk of CE opening a while ago.  I have accounts open on both sites and was sent this e-mail three days ago. 

Dear Chuck,

Get ready to start trading movies! The launch of real-money movie futures trading is almost here.

Cantor Exchange expects to receive final regulatory approval by April 20, 2010, and will start trading Domestic Box Office Receipt (DBOR) Movie Futures shortly thereafter.

We will soon begin accepting customer funds. In a few weeks we will send you instructions on funding your account and information on our incentives for doing so prior to "opening day".

Please note that the practice market will be stopped when the current It Pays to Practice period completes at the end of March, so that we can gear up for the launch. In the mean time, you can continue your practice trading to sharpen your skills and get yourself ready. If you have not gotten involved in practice trading yet, now is your chance to try to earn some cash while you practice and prepare for real-money futures trading!

Please let us know if you have any questions about the upcoming launch or about It Pays to Practice.

Get ready. The countdown has begun...

Richard Jaycobs
President, Cantor Exchange

Practice Trading: practice.cantorexchange.com
More Information: www.cantorexchange.com
Real-Money Futures Site: futures.cantorexchange.com

customerservice@cantorexchange.com +1 212.829.5455

Our address:
499 Park Avenue
New York, NY 10022

Like HSX, the Cantor Exchange will have futures for the 4-Week Total Gross of feature films appearing in North America.  It does not appear that CE will have Opening Weekend derivatives even though they have them on the HSX site.  It will be interesting to find out how liquid and useful this market can become.  How accurate will the prices be?  Will the prices of CE be significantly different from those on the play money HSX site?  How will Hollywood studios react to a futures market of their movies?

I’ll be monitoring the development of the Cantor Exchange and if I think I can get some good action, I’ll consider putting some money.  Currently, I’m practicing on HSX to just get a feel for how it works and I’m up $700,000(yay, monopoly money!)

HT: Midas Oracle

Box Office Predictions & Bets - Cop Out & The Crazies

Well, I finally got what I think are good odds on Intertops. My model is predicting a better than expected weekend for Cop Out with Bruce Willis and Tracy Morgan. The Crazies seems destined for a small opening below $20 Million. Not surprising considering Shutter Island probably stole all of its thunder last week. No bets on Intrade this week but I did go on Intertops and bet on Cop Out - USD 22 million or more for +300.

Movie	Opening Weekend Prediction
Cop Out	$25.88 Million
The Crazies	$17.09 Million