Putting the boff back into boffin

Enterprising Monash University student Greg Hill has applied prediction markets to a very Australian problem – which AFL team will be the next to have a player appear in court facing criminal charges? Here’s his description:

As part of The Speccy‘s campaign for a commercial online betting service for AFL players’ court appearances, we started a proof-of-concept prediction market, where anyone can play for free. This post introduces the Aussie Rules Misbehaviour Market (ARM) to help you get started.

First off, why are we doing this? The short answer is that prediction markets like this help people make informed choices. By providing a simple mechanism to share and aggregate information about likely future player misbehaviour, the community benefits in getting the best possible tip-offs. For example, if the odds dramatically shorten for one particular club, you may want to avoid their favoured drinking establishments. In effect, we’re using the “wisdom of crowds” to provide a more specific and reliable AFL Footballer Threat Indicator. …

The market itself is pretty straightforward to understand and operate, thanks to our partners at CrowdIQ. Each club has 1000 contracts (for a total of 16,000). Each contract will “pay out” $100 to the holder if and when that club is the first to have a player in court. All the rest pay out zero. All contracts are freely-traded in the interim at what ever price and volume participants wish. The price of a contract goes up and down over its lifetime, driven by buyers and sellers. The price is determined by how likely it is to pay out ie for that club to be the first with a player in court.

If the price of a contract on Collingwood is presently $20, that means that the market estimates the chances of Collingwood being the first club in court is 20%. If you reckon it’s actually more – say 50% – then you should bid $21 and buy up as many as you can. If you think the chances are really much lower – say 5% – then you should sell any Collingwood contracts you own. (You could also try short selling, laying a Dutch Book or related strategies.) …

Of course, there’s a wealth of private information that influences prices too. This is where the punters’ ability to sniff out rumours, anticipate crises and generally keep in touch with events comes to the fore. This is where it pays to keep an ear to the ground. So, if you’re a door bitch, drug dealer, footy slut, trainer, barman, journo, hooker, bouncer, priest or police officer – you get an unfair advantage over the rest of us.

Most of the time, the contract prices will reflect the general assessment of the lawlessness of each club. As such, they reflect a kind of broad-based reputation. …

Contracts are “resolved” once a player appears (either in person or by a representative) in an Australian court facing criminal charges. To avoid contempt of court issues, this market does not allow speculation on any decisions or findings of the courts. It only pertains to new matters about incidents that have (allegedly) occurred prior to the start of the market. Therefore, re-appearances about older matters – such as sentencing, appeals etc – do not count. …

Once a contract is resolved, the market is closed, contracts “pay out” (winners are grinners) and a new market is established for the next round of speculation.

Ready? OK, check out the prices … and happy punting!

The market opens on 13 August. I’d love to see someone let them run this for real money.

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5 Responses to Putting the boff back into boffin

  1. Greg says:

    Great!

    So can we assume you’re down for a $1000 worth of contracts during the IPO?

    I hear the smart money’s on Collingwood and West Coast …

    Cheers,

    -Greg.

  2. Andrew Leigh says:

    Greg, it’s monopoly money, right?

    What the heck, put me down for $10m.

  3. Rumrebellious says:

    What’s the liklihood of someone fixing an outcome to make a windfall?

  4. Greg says:

    @Andrew: Yes, it’s Monopoly money, but you only get 0$1000 (the unit of currency is “naughties”) per account. So if you want to get more 0$, then you’ll have to earn them by judicious selection of trades …

    @Rumrebellious: A helluva lot less than the likelihood of someone fixing an outcome in the same manner to influence a real wager ie betting with AU$ on the outcome of a match.

    Which does segue nicely to my next question: What possibilities for arbitrage exist between this market and others? I mean, betting on the outcome of the match may hold possiblities, but what else?

    Tickets for finals? (Maybe less people will want to see matches if a key player is in gaol.)
    Sponsorship deals? (Maybe companies would be less-inclined to throw cash at a club if it’s frequently in court. Yeah … maybe not.)
    Post-career TV commentating?

  5. Greg says:

    The market has started traded but I’m afraid prices are not coherent – they seem to indicate there’s a 0.7% chance of each club (of 16) being next in court. The problem is that people will be reluctant to trade a 7c contract that has a ~6% chance of paying out $100.

    This seems to be a side-effect of having way too many contracts (1000 per club) for the number of participants (less than 10) in the Dutch Auction. Like many market makers, perhaps I should just sit on my hands and hope the Coase Theorem will come to the rescue?

    Still, I’d like to know what important lessons are there for next time, (beyond rationing the number of contracts to, say, 100 per club).

    Thoughts?

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