Prediction market naysayers should learn from the recent NBA Draft

In the NBA Draft, 9 teams are selected to participate in a "lottery" to see who gets the first 9 picks. The 9 teams selected to participate are the ones that ended the season with the 9 worst records. The team with the worst record (Miami in this case) is given the highest probability to win the lottery (done with ping pong balls) and the team with the 9th worst record has the lowest probability of winning.

In this year's draft, the team with the 9th worst record was the Chicago Bulls. Going in to the lottery process, the Bulls were given less than a 2% chance of winning the lottery. A couple days ago, representatives from the 9 teams gathered to participate in the lottery process and low and behold, Chicago "beat the odds" and won the lottery. They now have the first pick in the draft coming up next month.

This improbable event is an excellent lesson for those who write off prediction markets as being "wrong." To say this, as a recent article in Wired did, about some political markets, shows a fundamental misunderstanding of the simple lessons of probability that are at play in a prediction market and were illustrated so nicely in the NBA draft.

In a prediction market, unless an answer is worth $0, we can never say the crowd thinks that answer CANNOT happen, only that there is a low probability of it happening. Similarly even if a stock is worth $95 (95% chance of answer happening) we cannot say that answer will occur for sure because there is still a 5% chance other answers could occur.

If you really want to judge prediction markets on their merits, you have to look at the number of times an answer occurred according to the probabilities assigned by the crowd. For example, for answers that ended with a price of $10, that answer should have only occurred 10% of the time. For answers that ended with a price of $90, that answer should have occurred 90% of the time. Only by looking at many markets in aggregate can you say whether your prediction marketplace is "accurate" or not.

This is also why we advise our clients that prediction market results should serve as inputs to decision making. The results from a market are only providing a range of probabilities of various answers occurring versus serving as a crystal ball to definitively predict the future.

Nate recently presented at a CFO's conference here in Chicago put on by the Corporate Executive Board. In preparing for his presentation he created some nifty graphs showing how Inkling has done across all its markets. He's going to post those in the next few days and you'll be able to see Inkling's comprehensive market performance.

New look, new brand

In the next few days we will be launching a complete re-design of the user-interface of the Inkling Markets platform. This is the fourth time we have fundamentally changed our UI and I'm sure there will be many more rounds to come. We don't believe in versions, only constant iteration.

The current look we have now has served us quite well but based on some new functionality we will be introducing in the coming months, it was time for a change. Specifically, we had a few design goals for this iteration:

• Remove the sidebar to give more room for a newly designed dashboard and other features we are working on
  
• Introduce a new color palette to match the new logo we're also introducing shortly
  
• Modify the layout to accentuate the growing trend in widescreen displays
  
• Gain additional flexibility for when we customize the look and feel for our clients
  
• Reduce the number of clicks for most administrative tasks
  
• Stay ahead of the burnout curve on the traditional "web 2.0" look of rounded corners and pastels :)
  

Not wanting to introduce too much change at once, we did not alter the fundamentals such as how trading is performed. Everything may look a little different but it functions the same way.

Here is a screenshot of the new marketplace dashboard:



In addition to the new look and feel of the application, we've re-designed our logo. We'll miss the little people that have been with us since we started the company, but it was ultimately time to retire them. We feel our new logo still conveys a diversity of voices coming together, albeit a bit more abstractly, while at the same time distinguishing us from those who had begun to use similar marks. This new logo also works much better on paper because all the shadowing and 3-d effects are 86'd. This was important as we are increasingly participating in conferences and workshops and often have paper handouts or presentations.





We're always open to feedback so please let us know what you think about the upcoming changes!