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May 13, 2013 | by  | in Features |
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iPredict, You Predict

If you’ve ever had an account with the TAB, you know that watching sport really is more fun when you’ve got skin in the game. But why should sport, card games and probability-based machines with flashing lights be the only thing you can bet money on? Many people aren’t interested in those things. If you’re reading this article there’s a good chance you’re interested in politics and current events more than sport. If that’s the case, iPredict is for you.

iPredict is a prediction market run by Victoria University, the only one in New Zealand. It was started in 2008 for research purposes and today runs stocks on hundreds of political, economic and social outcomes. Here’s a quick guide:

How does it work?

iPredict’s online platform allows users to buy and sell stocks which we create. The stocks are tied to a real-world outcome. The stock price is always between $0 and $1 because those are the possible outcomes for the stock, i.e. if National wins the next general election, then the stock ‘National to win the next General Election’ will close at $1, but if Labour wins it will close at $0. The price of the stock can therefore be interpreted as a prediction, i.e. if the National stock is trading at $0.55 then that can be interpreted as predicting a
55-per-cent chance National will win the next election.

How is a prediction market different from a bookie like the TAB?

The TAB sets odds, and traders bet at their prices. At iPredict you bet against other users. You offer a price for a stock, and other traders accept that offer. iPredict uses a ‘market maker’ which buys and sells a small number of stock to provide liquidity and stabilise the market.

So how do I make money?

You can make money by buying contracts at prices that you think are too low or too high. If, for example, the contract ‘National to win the next election’ is at $0.55, but you think that John Key’s charm will easily see him through another election win, then you would purchase the contract. Come election time, if National wins, you will be paid $1 per contract, meaning you profited by $0.45.

Wait, I can make money by a stock dropping in price?

Yup, it’s called short selling and it is incredibly confusing. Probably the simplest way of considering it is that you are binding yourself to sell a number of shares at their current price and buy them back at the close of the contract. So if the price when you bind yourself to the contract is 50 cents and then became 20 cents at the close of the contract you would make 30 cents a share. Doesn’t make sense? There are videos explaining it at ipredict.co.nz.

What are the costs?

iPredict covers its costs by charging a small trading fee, 0.35 cents per trade. There is also a two-per-cent withdrawal fee. There is a 1.75-per-cent credit-card deposit fee, but we also do bank transfers.

Sounds great, how do I get started?

Easy. Just go to www.ipredict.co.nz and set up an account. You can deposit as much or as little as you like, and even $10 or $20 is enough to get you started.

Nick Cross is a Victoria University student employed by the University to help run iPredict. iPredict hires students with a variety of different areas of expertise to run and develop the site.

 

EXAMPLE:

Say there was a contract on iPredict:

Studying at Victoria University will be free in 2014.

The current price for a stock on this contract is $0.40. This means the market thinks there is a 40-per-cent chance that studying at Victoria will be free in 2014.

Now say for some reason your wishful thinking overrides any rational thought, and you think that studying at Victoria University will be free in 2014. You buy that stock at $0.40, and wait until the end of the year.

If come 1 January 2014, Victoria has made studying free, the contract will close and all stocks will close at $1—as the probability of the contract eventuating is 1 or 100 per cent, i.e. certain. In your case, your stock which cost you $0.40, will see you get $1. This means you have made a profit of $0.60.

However, if Victoria didn’t make studying free, the contract will close with all stocks at $0.00 because the probability of the contract eventuating is 0, i.e. not going to happen. This means you lost $0.40.

Alternatively, say you thought that there was no chance of Victoria making studying free in 2014. You short sell that stock. That costs you $0.60, because you’re betting on the chance that it doesn’t happen (which is equal to 1 minus the probability of it happening). If Victoria doesn’t make study free—if you were correct—then you get a dollar back. Your profit is that dollar less the 60 cents you paid in the first place—$0.40. That, of course, is the ‘true’ price of the stock in the first place.

If you short sell it, you’re betting against something happening. Of course, if it does happen—if study at Victoria becomes free—you were wrong, so you lose your bet. Your shorted stock becomes worthless, and your original investment of $0.60 was wasted.

iPredict works by people betting whether events will happen, but you can make money before we’re certain whether those events will really occur. iPredict’s prices aren’t set by the people who run iPredict, they’re set by other traders. When you buy stocks, you’re buying
them off other people who think that they’re worth less than you do. The price can change over time depending on what other traders think will happen. If news or a rumour makes people think an event is more likely, the price will rise. You might then want to sell your stock immediately. If you do so, you’ll be making a profit off the new information before you even know for sure whether your original bet was right.

iPredict collects everybody’s opinions, but of course some people’s opinions are worth more than others. Say you’re getting OTP with Pat Walsh, and he lets slip that Victoria is getting rid of its fees. Being a callous bastard, you’ll turn to iPredict to make some moolah off this new information. You buy stocks. You’ll be more certain than most people about the outcome, so you’ll be willing to pay more for stocks. Your insider information has more of an impact than most people’s best guesses. That way, people with insider information can end up driving up the value of stocks.

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