February 17, 2001

It's Oscar season, and traders at the Hollywood Stock Exchange (HSX) Web site (http://www.hsx.com/) are furiously betting on which nominees will win. Prescient traders stand to earn millions. That is, millions of "Hollywood dollars", HSX's funny-money currency. Real-money markets -- from horse race gambling markets to financial options exchanges -- are known to provide good forecasts of future events. A new study, conducted by scientists at NEC Research Institute, Pennsylvania State University, and the Technical University of Denmark, finds that play-money markets like HSX can also yield surprisingly good predictions. So an Oscar nominee's price on HSX today really does reflect his or her chances of taking home a gold statuette on March 25.

"One of the benefits of markets is their ability to combine information from various sources and make that information available to the public via prices. While for most purposes game markets cannot replace real markets, in terms of combining information and making predictions, game markets can be similarly valuable," said Dr. David Pennock of NEC Research Institute, the study's lead author. "Another advantage of game markets is that they're relatively easy to set up, especially on the Web, without worrying about all the regulatory and legal hurdles of establishing a real market."

Pennock and his colleagues, Dr. Steve Lawrence, Dr. Lee Giles, and Finn Nielsen, also analyzed the Foresight Exchange (FX), a market on the Web (http://www.ideosphere.com/) where players bet (in phony FX dollars) on unresolved questions of scientific and societal interest, for example whether physicists will discover a never-before-seen Higgs boson particle by 2005, whether HIV will be curable by 2005, or whether a moon base will exist by 2025.

"Prices of securities can be thought of as the market's assessment of the probabilities of the corresponding events," Pennock said. (Current prices on FX imply that there is a 77% chance for a Higgs boson sighting, a 14% chance for an HIV cure, and a 50% chance for a moon base.) The scientists found that past prices did accurately forecast true outcome frequencies; for example, of all securities priced around 0.2, roughly one in five actually did come true. A brief description of their results appears in the February 9th issue of the journal Science. More detailed information on the study is available on the Web at http://artificialmarkets.com/.

The scientists found similar accuracy in last year's Oscar, Emmy, and Grammy awards markets on HSX. For example, of all the nominees priced at around H$10 prior to award announcement, roughly twice as many eventually won than among H$5 nominees, and similarly for other price ranges. The study also shows that prices of HSX "movie stocks" serve as good predictors for actual box office results.

The scientists see several potential applications of their findings. "People can look with some confidence to existing market games like HSX and FX for evidence of future trends. Others may set up new game markets on the Web, with relatively few impediments, as a way to gather information in areas of personal concern or interest. Economists may also find that game markets offer an interesting platform for experiments that would otherwise be too costly or impossible," Pennock said.

The study points out other striking similarities between game markets and real markets. For example, arbitrage opportunities on HSX (i.e., loopholes that allow traders to earn a sure profit without risk) tend to disappear over time, just as they do in real markets.

"Although no real money is changing hands, it seem as if players care enough about their portfolios to make reasonably informed decisions," said Pennock. "As a result, the game markets behave in some ways like real markets, showing signs of efficiency and predictive accuracy."