Inkling Markets

May 30, 2007 § 1 Comment

Prediction markets have gotten more and more mainstream over the past several years with companies like Tradesports.com leading the charge. I posted a while back about the recent trend in web applications towards harnessing crowd wisdom. Somehow I missed Chicago based Inkling Markets in that post. Inkling is a YCombinator participant (Winter 2006) that allows users to create customized predictive markets. I recently got a good look at the Inkling product through the Chicago GSB New Venture Challenge, where one of the participants organized a market through Inkling where participants could place bets on who would win the competition. It wasn’t an ideal setting to see the power of predictive markets because every participant had an incentive to jack the price of their own stock to improve the perception of their team and product. Markets like these work best when knowledge about a result or situation is dispersed through a large group of people and the only incentive participants have within the market is to guess the eventual result. However, it was very cool to see that a tool like Inkling is out there and easy to set up.

The Inkling guys spent a lot of time on their UI design (everything looks really nice) but I was forced to do a lot of calculations on my own to figure out if I should buy or sell. The math is generally straight forward (e.g.: User #1 bought stock A at $X, it is now at $Y, if #1 sells they will get $Z) but things can get extremely complex when users short stocks (which they have to be able to do for the market to be accurate) and when they buy and sell the same stock at multiple prices. I’m guessing this is what the Inkling guys are working on. A big decision they need to make is whether to show gains/losses relative to recent changes in stock price or relative to the purchase price…which is again complicated when you have multiple purchase prices and purchase times…

I think predictive markets are here to stay and their potential uses have yet to be fully discovered. One of my professors recently wrote this interesting paper about possible uses of predictive markets in corporate governance scenarios. Who knows if this is an area where markets will spring up, but many, many companies use prediction markets internally to monitor anything from product launch timelines to option prices. However, many of these uses never see the light of day since the markets can predict bad results which the companies generally want to control/spin. Anyways, good luck to the guys at Inkling! Their blog is here if you want to stay up to speed on their progress…

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