CNN Political Market

The CNN Political Markets are not running for 2012 but please visit the Inkling Public Marketplace for predictions on the 2012 election.

CNN Political Market
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Introduction

The goal of CNN Political Market is to combine the opinions of a diverse group of people to try and predict the probability of an event occurring or the value of something.

Why is this important? Because more often than not, a diverse group of people or "crowd" will generate a more accurate prediction than an individual or a small group of "like-minded" or "single-discipline" folks.

In business, politics, and culture, this can have big ramifications:

  • Predictions often turn out to be more accurate than surveys and polls;
  • More accurate forecasts affect how marketing dollars are spent, how many widgets should be built in the first run, etc.;
  • Decision making is more democratized, giving everyone input where they may not have had it before;
  • Markets can serve as on-going indicators for key performance metrics.

Use the arrows above to continue...

What is a Prediction Market?

In more technical terms, the CNN Political Market is a "prediction market."

The term "market" is used because people express their opinions of what they think is going to happen by buying and selling stocks representing possible answers.

How do Prediction Markets Work?

We think the best way to understand how prediction markets work is through examples, so here goes:

Let's say you're trying to figure out the probability of an event occurring. For example:

"Who will win American Idol this year?"

How do Prediction Markets Work?

When the question is asked, there are only 4 contestants left:

"Who will win American Idol this year?"

  • Kelly
  • Ryan
  • Simon
  • Grace

How do Prediction Markets Work?

In a survey, this would just be a multiple choice question and you would pick one:

"Who will win American Idol this year?"
  • Kelly
  • Ryan
  • Simon
  • Grace

How do Prediction Markets Work?

But in a prediction market, each answer has a number (stock price) associated with it:

"Who will win American Idol this year?"

ANSWER STOCK PRICE
Kelly $65
Ryan $10
Simon $15
Grace $10

How do Prediction Markets Work?

Here's the key: in a prediction market, the stock price equals the probability that answer will be correct.

ANSWER STOCK PRICE
Kelly $65
Ryan $10
Simon $15
Grace $10

So in this example, people think Kelly has a 65% chance of winning American Idol.

How do Prediction Markets Work?

Another example of how prediction markets work is when you want to forecast the value of something.

Let's say you're trying to figure out what a barrel of oil is going to cost in 6 months:

ANSWER CURRENT PRICE
Barrel of Oil in May $85

In this case, the stock price represents a literal value. When you buy shares, you push the price up. When you sell shares, the price goes down. So if you think the price of oil will be higher than $85, you would buy. If you think it would be lower, you would sell.

How do You Make Money?

Let's go back to our American Idol example.

Let's say when you looked at the market, Kelly's current price was $65, meaning the crowd thought there was a 65% chance Kelly would win.

You think Kelly is going to win so you buy 10 shares of Kelly at $65/share.

A few weeks later American Idol is over and Kelly does win. The market is closed and the probability Kelly will win is now 100% which means her stock is worth $100/share. Since you bought at $65 and it's now worth $100, the difference was just deposited in your account.

Congratulations, you just made money.

How do You Lose Money?

On the contrary, if you had bought a position in Ryan, the probability he will win at the end of the show is 0%, so your stock would then be worth $0 and money would be removed from your account to cover your losses.

Figure Out Your Own Strategy for Trading

Some people only trade once and then wait to see if they predicted the correct answer. Other people trade several times before the market closes to make sure they lock in their profits. A good rule of thumb is if you feel more strongly about the answer you have stock in, buy more of it. If you don't feel good about it, sell the shares you own and/or buy something else.

Afterall, that's how you express your opinion in a prediction market - putting your money where your mouth is!

The Marketplace - Finding Markets

Now that you know enough about trading in a prediction market to be dangerous, you need to find some markets to trade in!

Easy enough, to find a market:

    Type in a phrase in the search bar

    Click on a tag (otherwise known as keywords)

    Click on the "markets" button to see a list of all markets, the most recently created markets, the most active, etc.

The Marketplace - Finding Markets

Once you've found a market you want to trade in, just click it. You won't see any crazy stock symbols or stock market speak, just questions people are asking:

Who will be...What will happen when...

Select a question you would like to answer and click on it. Now you're ready to trade.

The Marketplace - The Trading Assistant

Unlike trading online using other sites, the trading assistant will walk you through making a trade in 4 steps and in plain English.

Here's how it works:

  1. First you'll be asked what possible answer you would like to trade in.
  2. Second you'll be asked what you think of that answer and asked to quantify how strongly you feel about that answer.
  3. How strongly or weakly you feel about your answer equates to the number of shares you are buying or selling. For example, if you say you are very confident about your answer, the trading assistant will recommend you buy a lot of stock. Not so confident, you should take less of a risk and buy fewer shares.
  4. Finally you are asked to confirm how many shares you are buying and selling, then you complete the trade. That's not so bad, is it?

The Marketplace - Your Dashboard

Once you've traded, keep track of what the latest prediction is using the Dashboard.

There you will see how other people have moved the price of the stocks you own, remind you what you paid for the stock originally, and tell you how many shares you own.

The Dashboard is also where you can close the position you've taken in a particular stock.

Re-visiting our American Idol example again - if you no longer think Kelly is going to win and want to sell her shares, you would simply click "liquidate" on the Dashboard and your shares would be sold.

A Few More Things...

Before you get a passing grade in Markets 101, you should be aware of other features you can take advantage of:

  • Your Profile: click on Settings and create a profile about yourself your fellow traders can see.
  • Change Your Password: also you can change your password any time.
  • Alerts: get alerts about when new markets are created via email or RSS. Look for the RSS icon other places to receive additional alerts.
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