Wellington
Some of the challenges of launching a new, useful and innovative internet based product areapparent in the iPredict.co.nz business.
Officially launched in 2008, just before that year’s general election, iPredict quantifies whatare otherwise qualitative measures. Traders are betting on different predictions, allowing people tobuy and sell stocks in future political and economic events. They are literally putting their moneywhere their mouth is.
Put another way, the current market price (seen on iPredict) can be interpreted as predictions ofa probability of an event. (There’s a Wikipedia explanation of prediction markets in general
This, from a psychological and accuracy point of view, makes the prediction of future events muchmore accurate than polling.
When iPredict asks binary questions (yes/no) it has a much more accurate estimation of what theactual outcome will be.
“Because people are using real dollars, it is more resilient to bias and manipulation,” saysiPredict chief executive, Matt Burgess. “It makes that sort of behaviour costly.”
It isn’t a platform for betting on sports, ‘Dancing with the Stars’, or the Oscars. It isabout measurable future events however, though not too far distant.
Burgess has an economics background, and successfully launched (and recently sold) a start-upweb-based company called mytradesman.co.nz. What became Burgess’s main job on joining iPredict in2006 was getting the
Viclink
/
The FMA eventually allowed iPredict to burst into life, without the need to issue a prospectus– as is usually the case when asking for someone else’s money for a business project.
The company’s trading fees are one third of a cent for every share traded, and a 2% withdrawalfee if traders take money out of their account (though only if they’ve made money). iPredict alsosells the license to use its facility as a software-as-a-service model.
The site has 5500 traders, with about 600 being active in any one month and the current electiondoubling active participants.
Most peoples’ trading float is about $80, and there’s about $500,000 of deposited funds saysBurgess.
“But we’ve never had a report of problem gambling through our site,” he says. “Predictionmarkets are not about those you’d find at night playing the pokie machines. It attracts studentsand professionals, and is less about entertainment and more about testing your opinion and thequality of your ideas.”
One of iPredict’s features is the almost instant reaction it can provide for changes in events.“It is real time, accurate information,” Burgess says.
The beauty of prediction markets is that manipulation is in a sense, self-correcting. Becauseeach bet on one outcome, requires someone else to bet on the equal and opposite outcome, the oddsshould always add up to one. And they do over time.
But, as happened recently, someone bet heavily ($500) for Labour to win. The price on this liftedsharply. Almost instantly, keen and observant traders were in, taking the opposite bet – figuringsuch an event is of such little likelihood that they were sure to make some money.
“A manipulator, by definition, is willing to pay too much for a trade,” says Burgess. “Itincreases the accuracy of the market, since where you have people willing to pay too much you dragmore people, more dollars in. Manipulation can’t be understood as a rational trading strategy.What they do do though is create opportunities for everyone else, creates an arbitrage position[where someone backing both sides of a bet at the same time can’t lose money]. Manipulationdoesn’t permanently affect the market trade price at all.”
As a business model, iPredict has its challenges, though “we’ve got really good software thatwe can license,” says Burgess. “It’s battle-hardened, and has had three years of operatingusing real money. Every error has been caught.”
The platform is also scalable as well as being robust, and the next targets for growth areAustralia and Asia. The USA is currently off the target, its Securities Commission not allowing theconcept. Indeed, a disclaimer suggests that Americans can’t use what is, at this stage, NZ-centricpolitical and economic event prediction stocks.
Burgess is somewhat surprised, and not for want of trying and selling, that iPredict hasn’tbeen used more by mainstream media during the election run-up.
“It’s more accurate, proven, than polls,” he says. “When something happens, the marketreacts instantly. It should be front and centre of major organisation’s election coveragestrategy.”
This is one of the reasons iPredict set up its own election oriented TV channel (on Stratos,Sky/Freeview 89). electionresults.co.nz has beenfronted by Burgess himself, using iPredict charts as the basis of discussion.
Burgess says that the platform is actually complementary rather than a competitor to traditionalpolling.
“Where there are no polls, iPredict may be less accurate,” he says. “In last year’smayoral elections, traders got it right in Auckland, Christchurch and Invercargill. They got itwrong in Wellington, Hamilton, and Dunedin. There were few polls in these places, and wherethere’s no polls, there is no raw material for traders to predict with, a less clear view of whatis happening.”
Burgess points out that iPredict also asks a different question than polls.
“One of the few places there’s an overlap between polls and prediction markets is forecastparty vote share, but polls cannot answer questions about likelihood, for example how likely acertain party is to win the election, or how likely a coalition deal between X and Y will be struck,and so on. And prediction markets cannot answer questions about how certain demographics will voteor which policies they will be most responsive to. So there is actually strong complementaritybetween polls and markets. Each source is rich in its own way.”
iPredict has proven that the economic theory of a prediction market works on a web platform,there’s robust software behind peoples’ trading and accounts, and that it is a cleverproduct.
The next challenge is to take it international – but that in itself may be at least as hard asproving its worth in the New Zealand market.
Postscript
Between yarning to Matt Burgess and posting the story, the election’s come and gone. Yet againiPredict beat all the poll people – who had been predicting National with over a low 50s to mid50s majority.
IPredict’s verdict was 48% - which it was.
The site is currently running over 340 contracts on which politicians will fill which particularportfolios.