Monday, October 31, 2005

News from Markets, News about Markets

I was researching information markets when I came across this Tradesports page. It showed "SC.CONFIRM.ALITO: Samuel A Alito to be Confirmed to the Supreme Court by the US Senate" last trading at 78.5/claim. I then knew—even before reading Instapundit--that I'd erred in predicting that Bush would nominate Judge Edith Jones. Good thing I didn't put money on that claim!

Though I missed my prediction, my experience shows an information market working precisely as Robin Hanson predicted: As a news source. The news lies in the "price/claim" data generated by the market. That data represents a quantified measure of the current consensus about any particular claim traded on the information market.

In "price/claim" data, an information market generates a positive externality. Some institutions internalize that benefit by using private markets; see, e.g., HP's use of internal markets to predict sales. Open markets, like Tradesports, release the externality, letting it work like a lure on traders. The market then makes money off of transaction fees.

More generally, the history of a claim traded on an information markets offers a positive externality. It genesis shows the origin of a tradable uncertainty—such as Alito's nomination. The ups and downs of a claim's price shows the path towards paying certainty. The closing price shows traders' consensus view of the claim's truth.

Those reflections about how we can get news via information markets reminds me that I have some news about information markets. By way of illustration, I'll offer the news items as tradable claims:

Claim 1: The U.S. federal government will establish an information market trading in claims about Avian flu.

Claim 2: One or more U.S. congressional representatives will introduce a bill clarifying the legality of information markets under U.S. state and federal law.

Claim 3: The Simon Exchange will announce one or more institutional sponsors and supporting donors.

Claim 4: I'm gonna' write a paper about how information markets can compete with patents in encouraging innovation.

OK, granted; claim 4 is a gimme'. I largely call the shots on that one. I have a big hand in claim 3, too. So I cannot suggest you bet against me on those. Claims 1 and 2 lie largely outside my control, however. On those, I should think you could bet either way. I just want to flag the claims for you attention, as worthy subjects for trading.

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