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Owen Healy edited this page Sep 6, 2011 · 1 revision

A Prediction Market for Voting on Trades

Sites such as StackOverflow allow users to vote on items posted by other users, to express approval or disapproval. Here that concept is extended with a prediction market to give users an incentive to vote and to vote well.

The implementation tries to work as much like a real prediction market as possible: the profit to the voters is tied as literally as possible to the object being voted on. This means that voting doesn't add any "new" concept of what a winner is -- it merely mimics the existing concept.

Say Jen sells a call option XYZ to Nitish for $100 (the other end of the option is currently held by Atif). To support voting, the following things happen at this time:

  1. Jen and Nitish set aside $0.25 each into the common pool.
  2. Nitish places 0.02*XYZ into the buyer pool.
  3. Jen places 0.02*$100 into the seller pool.

The three pools are tied to this particular trade. The exist, potentially, forever, although the software may wish to reap pools on old trades.

The game then does a hacky "pre-money evaluation" of the pools. Since one half of a trade is always cash (please let this be true), the game values XYZ at $100 and both pools are valued at $2.00.

Casting votes works exactly analogously to investing in a company. A vote costs a user $0.20, and in exchange they get $0.20 worth of the "company".

Say Mike thinks that Nitish got the better deal, so he casts the first vote, for Nitish. Mike pays $0.20 into the buyer pool. Now the buyer pool contains:

  • $0.20 in cash
  • 0.02*XYZ

Since 0.02*XYZ is considered to be worth $2.00, the pool now contains $2.20, so Mike's $0.20 entitles him to 9% of the pool, which he receives instantly in the form of $0.018 in cash and 0.02*0.09*XYZ.

A note on small numbers: Votes are supposed to be small compared to other trades, but not so small that users don't bother with them. Because votes are tiny enough to divide cents and be annoying when looking at balance sheets, they don't show up on balance sheets until they are liquidated and added to the user's single pool of cash.

Mike also receives, as a bonus for voting, 25% of the current contents of the common pool. This gives users an incentive to vote and to vote early. Users can only vote once per trade.

Vote tallies are displayed along with the announcement for a trade on the PitFail website. The votes give a sense of how the community judges the prudence of that trade.

After voting, Mike now has 0.02*XYZ, which, as we said before, is a call option, the other end of which is held by Atif. From Atif's perspective it is irrelevant who holds the other end of the option, and it doesn't show up in his balance sheet.

At some point, the exercise date for XYZ will come due, and it will be fully or partly liquidated. Any cash is returned to Mike's pool of cash; any stock is immediately sold and converted to cash.

Derivatives aquired through voting sit around in a user's "voting balance sheet", which is not shown.

Sites such as Fluther and StackOverflow give "reputation" to users for receiving votes. PitFail voting also offers another possibility: reputation for casting votes accurately: "casting reputation" would simply be the total amount of cash received from casting votes to date. A user with a high casting reputation is good at judging other people's trades.

Casting or receiving reputation could be shown along with user names on the site to create a more competetive atmosphere.