Stefan Luckner

On the Forecast Accuracy of Sports Prediction Markets

Accurate forecasts are essential in many areas such as business and sports forecasting. Prediction markets are a promising approach for forecasting future events and are increasingly used to aggregate information on particular future events of interest such as elections, sports events, and Oscar winners. In this paper, we present the results of an empirical study that compares the forecast accuracy of a prediction market for the FIFA World Cup 2006 to predictions derived from the FIFA world ranking and to a random predictor. We find that prediction markets for the FIFA World Cup outperform predictions based on the FIFA world ranking as well as the random predictor in terms of forecast accuracy.

Formal Specification of Web Service Contracts for Automated Contracting and Monitoring

Service-oriented computing as a concept for providing interoperability and flexibility within heterogeneous environments has gained much attention within the last few years. Dynamically integrating external Web services into enterprise applications requires automatic contracting between service requestors and providers and automatic contract monitoring. This paper suggests a semi-automatic approach since in the current legal environment full automation is not feasible. We elaborate on the content of Web service contracts from a legal perspective and derive a set of legal requirements. Based on these requirements we propose an ontology-based representation of contract clauses as well as monitoring information. We can thus automatically evaluate whether a service execution meets the requirements expressed in a contract

Arbitrage Opportunities and Market-Making Traders in Prediction Markets

Prediction markets are a promising approach for predicting uncertain future events and developments. These markets will work well if they are efficient and in efficient markets, one does not expect arbitrage opportunities to be persistent. This paper therefore studies whether pure arbitrage opportunities existed in a sports prediction market. Moreover, market liquidity can become an issue in prediction markets since new information is potentially not immediately reflected in trading prices and traders might also lose interest in the markets if they are il liquid. This paper therefore analyzes whether traders try to exploit il liquidity by taking on the role of market makers in prediction markets. Our analysis of a sports prediction market for the FIFA World Cup 2006 shows that prediction markets also appear to be efficient in the sense that there are few substantial arbitrage opportunities available. Furthermore, we find that market markers play an important role in prediction markets. They serve as liquidity providers and allow for continuous trading.

Semi-automated management of web service contracts

Service-oriented computing as a concept for providing interoperability and flexibility within heterogeneous environments has gained much attention within the last few years. Dynamically integrating external web services into enterprise applications requires automatic contracting between service requestors and providers and automatic contract monitoring. This paper suggests a semi-automatic approach since in the current legal environment full automation is not feasible. We elaborate on the content of web service contracts from a legal perspective and derive a set of legal requirements. Based on these requirements we propose an ontology-based representation of contract clauses as well as monitoring information. We can thus automatically evaluate whether a service execution meets the requirements expressed in a contract.

Fraud detection in play-money prediction markets

Prediction markets are increasingly used to aggregate information on particular future events of interest such as elections, sports events, and Oscar winners. However, prediction markets are sensitive to manipulation and price distortions. In this paper, we show evidence for fraud in a play-money sports prediction market. In contrast to the often considered outcome manipulation in the context of political stock markets we were only looking for violations of our general terms and conditions, i.e., for traders creating multiple user accounts and trading against themselves in order to transfer cash from one account to another. We found evidence of suchlike coalitions and received complaints about it by annoyed traders. We discuss possible countermeasures in order to avoid or at least detect this kind of fraud in play-money prediction markets and present a tool which can be used to detect coalition building while operating a market.

AKX – An Exchange for Predicting Water Dam Levels in Australia

The Australian population in rural and urban areas is heavily influenced and affected by such water shortages, either economically or in their life style. Managing water resources is therefore seen as a critical environmental, social and economic issue. Good forecasts can provide better understanding for the current situation (e.g. drought severity) and consequently improve decision making.

Applications of Prediction Markets

This chapter presents previous fields of application of prediction markets. Subsequently, we discuss several field experiments in more detail. We start with a description of the 2006 FIFA World Cup prediction market called STOCCER. Moreover, we also present the political stock market PSM and the Australian Knowledge eXchange AKX. At the end of the chapter we give an outlook on how prediction markets can be used to generate and evaluate innovative products and services.

Key Design Elements of Prediction Markets

Before studying more advanced applications of prediction markets, it is necessary to gain a basic understanding of their key design elements. Like any market, prediction markets have to be designed and implemented very carefully in order to ensure that they are suitable for aggregating traders’ information (Weinhardt et al., 2003, Weinhardt et al., 2006a). The key design elements comprise the specification of contractstraded in a prediction market, the trading mechanism, and the incentivesprovided to ensure information revelation (Spann and Skiera, 2003). Moreover, diversity of information is required in order to provide a basis for trading (Wolfers and Zitzewitz, 2004). Heterogeneous expectations about the future among traders are desirable and the selection of tradersis thus also considered a key design issue (Tziralis and Tatsiopoulos, 2007b). The following subsections describe these design elements in more detail.

Fundamentals of Prediction Markets

After a short history of prediction markets in Section 2.1, we define prediction markets as markets that run for “the primary purpose of aggregating information so that market prices forecast future events” (Berg and Rietz, 2003) in Section 2.2. The theoretic foundations of prediction markets are found in Hayek’s analysis of market-based economies and in the rose of information in Fama’s efficient market hypothesis in Section 2.3. The interaction between incentives for trade information revelation by trading transactions and the resulting adaption of prices is illustrated by a hands-on example in Section 2.4 on the operational principle of prediction markets.

Market agents with a sense for mechanisms

When software agents act on markets they typically face a predetermined market mechanism. Their strategies are a priori tailored by the agent designer to suit the market mechanism at stake. So, the market mechanisms are only considered and examined at design time. In this paper, we present an approach to how agents themselves can grasp market mechanisms at runtime, directly derive a valid interaction protocol and consider the mechanism structure for their strategies - even for mechanisms they have not known before. For exemplifying our ideas, we present a BPEL implementation of a reverse English auction that is based on the notion of an auction reference model and make the BPEL description available to the agent. We show how the agent will derive an interaction protocol - the valid behavior - and how it even forms a reasonable strategy when presuming some generic market knowledge and basic strategy building blocks