Wednesday, July 29, 2009

New Feature: Correct a late cash out, aka "Cash out a question in the past".

A common problem in prediction markets is:

What if you want to ask a question with no specific closing date in the future?

In other words, you know you can enter any arbitrary cut off time for the question like "the end of the year". But some report or announcement that your question is based on, could come out at anytime with the answer to your question.

And as soon as people hear about it, before the market administrator can cash out the market, now a bunch of people can make free fake money buying up a guaranteed sure thing. The traders end up looking smarter then they actually were according to their balances and winnings, and this question no longer reflects the true probability predicted by your crowd.

Often there's great prediction market questions that fall into this category.

So the team at Inkling came up with a solution to this. You can now cash out things as if they were cashed out in the past, refunding any trades people have made since then, and setting the stock price back to where it was before the answer was publicized and made known to your astute traders.

Here's a concrete example where we had to use this ourselves recently.

Awhile ago, I created the question: "Which of these companies will declare bankruptcy by 2010?" But of course, bankruptcy news just gets announced whenever. I couldn't set much of an expiration date on this except for Dec 31, 2009. And I don't watch the news all day long to cash the question out as soon as there's an announcement.

So yesterday evening I received the news Station Casinos announced bankruptcy yesterday. The news had first come out though at about 5PM Central time. So in a short span of a few hours after 5PM Central yesterday, traders had bought Station Casinos up to about $99. It's free fake money after all. They know I have to cash it out at $100.

But now with the ability to cash things out in the past, I can correct this.

I just go to cash out the stock as before, but now there is a link to click to cash out the question at some point in the past.

I pick the true date and time in the past, just before the answer to the question was publicized to everyone. I made this 5PM Central yesterday, as that seemed to be the earliest news announcement I found.

And I continue cashing out the question's answer just as before.

So now, anyone who made a trade after 5PM yesterday had their trade refunded, and the predicted price of the stock is reset back to it's value at that time.

We hope this is useful and clears up any confusion on how best to ask questions like this of a prediction market.

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