Silicon Valley venture capitalists explain in detail the past and present lives of predicting the market

In 2019, DeFi (decentralized finance) is seen as one of the most promising scenarios in blockchain. DeFi, which has been developing for several years at Ethernet Square, has borrowed from the earliest decentralization, giving rise to more than a dozen types of fine ecology, including infrastructure, exchanges and derivatives. Among them, the forecast market represented by Veil and Augur is hot enough.

According to the definition of Wikipedia, forecasting market is a kind of speculative market for the purpose of forecasting, which appeared as early as the 1990s. Because of the advantages of decentralization and high transparency, block chain + prediction is expected to be the first to land, and with the wave of DeFi, it has entered the field of vision of more people.

The writer is, Village Global, co-founder of venture capital fund Village Global, a well-known seed venture capital fund that raised $100m in March 2018. LP includes Microsoft's Bill Gates and Facebook's Zuckerberg.

Original title: "Defi Series | VCs teach you to use economics to understand and predict the market." translated by: Erik Torenberg: daily Planet aloe

Original title: "Defi Series | Venture Capital bigwigs teach you to use economics to understand and predict the market."Original author: Erik TorenbergTranslation: daily Planet aloe

Economist Hayek (Friedrich Hayek) pointed out in his 1945 book, the Application of knowledge in Society, that different information is aggregated into market prices in a variety of ways.

Hayek also wrote that what is in a person's mind is only a small part of the sum of all the knowledge that people have in society. "the socio-economic problem is not just a question of how to allocate" given "resources, it is also a question of how to use knowledge, which is not all given to anyone. "

But what if we can unlock this information? What if we could systematically use the wisdom of the masses to distinguish experts from charlatans and then involve experts in key decisions?

What if we could bring together people who work on the front lines of national security, public health, drug development, movies, government-funded projects, trade agreements, banks, and so on, and ask if their work is working properly? For example, when we buy a self-driving car, we can ask all the employees who work in Tesla instead of Elon Musk.

More broadly, what happens when everyone has their own point of view? What if people's forecasts have economic incentives? What if people make money by eloquence? Will this help us make better decisions?

This is the hope and commitment to predict the market.

This is the hope and commitment to predict the market.

The forecasting market is actually a gambling market, designed to predict what we want to know and find out what people really believe.

For example:

Will X happen?

If x happens, will y happen?

If x happens, what happens to y?

Sports and politics have the most popular forecasting markets, but in fact futures contracts, bonuses and insurance agreements are predictive markets because they use people's desire to make money to predict the future.

Although stocks have some cash flow (through dividends), they actually have the gene for speculative pricing. By contrast, predictive markets tend to return to some objective things in the world. The predictive market buys information from those who know the future, or at least those who are better at predicting the future, and the market represents the public's best guess about the future, and those with future information are paid for it.

Why is it so important to predict the market?

"our academic institutions tend to reward popular people rather than the right ones, which may hinder the pace of scientific progress. "- Robin Hansen

From a macro point of view, predicting markets is important because they can make better decisions. If we agree that more accurate information is a good thing, then we have the potential to improve accuracy in assessing certain possibilities, thereby ensuring stronger governance and management.

Most of the current forecasts are unreliable. Politicians make baseless predictions, while the media profit from sensational news reports; all kinds of experts have no interest in the game, and even if they make mistakes, they usually don't go back and correct themselves. Experts have no incentive to predict, because they will lose more.

However, charlatans make baseless predictions in order to attract the audience. If they are wrong, their "fan" (tribe) still supports them. Celebrities win in opinion, collectivism (Tribalism) above truth, and entertainment above all else.

In an era of fake news, forecasting the market can have a huge impact.

In fact, forecasting the market is a machine for finding the truth. By linking predictions to money, people can focus on accuracy rather than being liked or popular. If they are unwilling to bet, they will be discredited, if they are wrong, they will lose money and reputation; vice versa, if they win, their expertise will be promoted, humility will be appreciated, and charlatans will be eliminated.

This is not entirely the wisdom of the masses. This is the wisdom of the "right" group-the wisdom of experts. Just as important, it weakens or even silences the voice of the bragger. If you don't know what you're talking about, you'll give up voting, because if you don't know, you'll lose all your money.

How to apply it to wild scene (the wild)?

For example, a board of directors can decide whether to hire or fire an CEO,. They can decide based on their own instincts, or they can summarize the opinions of their employees. The company's question can be: "if we fire CEO, how much revenue will we make in the first quarter?" instead, we can ask, "if we don't fire CEO, how much revenue will we make in the first quarter?"

Another example: movies. Movies have huge fixed costs and it is difficult to get MVP. Will the new movie sell well? Can employees assess whether the film can be completed on time? Is it as good as originally thought? Will people like it?

History: where did the modern concept of forecasting the market originate?

Today's forecasting market is a more specific form of the "crowdsourcing" (crowdsourcing) concept, or a means of using the wisdom of the masses to better understand the true nature of reality. As early as the 4th century BC, Aristotle discussed the use of people to achieve this goal.

"it might be better for a lot of people to get together. It is not individual, but collective, just as public dinners contributed by multiple people are better than those offered by one person. For where there are many people, everyone has a part of virtue and wisdom, and when they come together, the masses become a bachelor with many feet, many hands, and many senses, and become a man morally and intellectually. Aristotle's Politics

In modern times, there is a famous example. In 1906, at a county fair in England, hundreds of people tried to estimate the weight of a bull. It was then observed that the accuracy of the median guess (1207 pounds) and the true weight (1198 pounds) was maintained at less than 1 per cent.

Forecasting markets combine group wisdom with the efficient capital market hypothesis (indicating that asset prices reflect all available information that provides the best estimate of intrinsic value).

Over the past 20 years, these concepts have been more widely used in different topics such as business project deadlines (Project Xanadu), intelligence analysis (DARPA experiments), and box office success (Hollywood Stock Exchange).

Common criticism

There are some criticisms and challenges to the wide application of forecasting market. We can divide them into three categories:

  • Established power structure
  • Implementation challenges
  • Causality
  • Established power structure

    If we think about why things happen or don't happen in our society, the drivers of change are powerful (for example, rich families, business leaders, and political leaders).

    Powerful people tend to move towards profit and use every means to retain their power. Robin Hansen (Robin Hanson) 's "Elephant in the brain" (Elephant in the Brain) delves into how people are good at rationalizing the interests of powerful people as well as the best interests of the collective.

    However, the predictive market proves that most managers cannot predict the future, thus threatening the hierarchical control of managers. Predicting that markets will operate as they should, would weaken those in power and give everyone else more say. Although this can improve society as a whole, it may also worsen the status of the strong.

    There is a view that without centralized restraint, communities will inevitably fall into mediocrity and chaos (essentially eternal September), so it may be a necessary sin to have a small number of users responsible.

    Implementation challenges

    In forecasting the implementation of the market, we need to consider two main factors: 1, the cost of market operation and maintenance; 2, the clarity of the relevant market and results.

    At present, most of the major forecasting markets are run by centralized teams and platforms. These teams are important because they create new markets, ensure fairness, handle disputes, and so on.

    Therefore, with such forecast markets, often lead to negative sum game. The current forecast market is more like gambling (either I win or vice versa) than investing in most other markets (the overall growth rate is positive).

    For the forecast market to really take off, we need to create more positive sum situations, either significantly reducing the costs associated with these platforms or proving their positive sum nature.

    In addition to costs, the clarity of markets and results can be a major challenge. The market itself needs a clear language in which there is no possibility of misunderstanding. On June 10, 2019, if the market thought Curry would hit three points in tonight's game, what would happen if the game was delayed and he didn't hit three points until 1: 00 a.m. Eastern Standard time on June 11, 2019? If the market requires a project to be completed by a specific date, how do you define "completion"? What if everyone thinks the project has been completed but needs to follow up next month?

    If the forecast market is completely decentralized, how do you prove that a result really happened (for example, a Oracle database problem)? If the market is a sports game, do you trust a centrally run ESPN?


    The final major challenge is that people's bets affect actual results and can fulfill the prophecy themselves. The surge in markets may mean that everyone is motivated by money to become effective and deterministic in the future, because people can't just predict, but also affect the future.

    This may have a positive effect, but it can also lead to serious negative consequences. The most extremely negative outcome could lead to assassinations or terrorist attacks. If there is a market for a person to die one day, this can be encouraged to happen.

    On the positive side, however, if the market for a project needs to be completed within a certain period of time, the person involved may have sufficient financial motivation to ensure that it is completed.


    Despite these challenges, we believe that forecasting markets with the help of group forces will eventually have a positive impact on society. As the importance of revealing the truth increases and the cost of false information rises at the same time, these types of market value will become more and more important.

    We are pleased that decentralized projects such as Augur continue to emerge and try to address these challenges.



    Centralized forecasting market

    Metaculus / Metaculus is a community dedicated to bringing together the collective wisdom, insight and wisdom of participants to accurately predict future real-world events.

    Hypermind / Hypermind uses the wisdom of the elite to make the most accurate predictions about politics, economics and your business.

    With the most extensive and independently verified early forecasting record in history, Good Judgment and its globally certified Super Predictive Network, Good judgment helps users think more clearly about an uncertain future.

    Predictit / Predictit is a project at Victoria University in Wellington to promote research on how market events are predicted.

    Smarkets / Smarkets simplifies peer-to-peer trading in sports and politics, allowing users to set their own odds and trade with others confidently.

    Founded in 2016, Betfair Paddy Power Betfair is an international, multi-channel sports betting operator.

    Decentralized forecasting market

    Augu-A decentralized protocol that allows users to create their own forecasting markets, a set of smart contracts that can be deployed to the etheric block chain.

    Through the decentralized platform based on block chain, Gnosis realizes the redistribution of resources from assets to incentives, information to ideas.

    Veil / Veil is a P2P forecasting market based on open protocols such as Augur and 0x, designed to bring Augur into the mainstream.

    The Guesser-mission is to build a community of people to predict the future, based on Augur, by connecting people to the market so that they can invest in the results of real-world events.

    Blitzpredict BlitzPredict is a gaming exchange focused on sports, e-sports and politics. Based on the Ethernet block chain, powered by Augur and 0x, and based on the block chain technology, provides a low-cost, highly transparent market while reducing counterparty risk.

    Flux / Flux is a P2P trading platform for start-up derivatives. Flux allows users to create entrepreneurial milestones such as predictive markets, transactions such as product releases, investment rounds, and progress (or setbacks).

    _ Note:

    The Project Xanadu:Xanadu project was the first hypertext project founded by Ted Nelson in 1960. In 1990, the first known enterprise forecasting market was used in Xanadu. Employees and consultants bet on the cold fusion controversy at the time, with the goal of alerting employees to the risk that Xanadu might not deliver its products soon. Cold fusion: a technical term for nuclear fusion at relatively low temperatures (or even room temperature); it was controversial in 1989 when many scientists tried to repeat the experiment but found that the same results could not be reproduced.

    DARPA's experiment: in 2001, the Defense Advanced Research projects Agency (DARPA) tried to use the forecasting market to improve intelligence capabilities, launching FutureMAP, through the integration of intelligence departments, applied to analysis of interest to the Department of Defense, including geopolitical risk prediction, emerging technology time prediction, and impact prediction on national security. The project was cancelled in the summer of 2003 under a series of congressional criticism.

    HSX Hollywood Stock Exchange: in 2001, brokerage firm Cantor Fitzgerald Securities realized for the first time that it could make money by turning the paper hype at the weekly box office into a real futures market. The company has just acquired the Hollywood Stock Exchange (hsx.) The com), Hollywood Stock Exchange uses the box office as a forecast to predict the performance of different films at the box office. After the game is registered, you will soon get $2 million in fake money to bet on the performance of any movie in the first four weeks of release in American theaters. _

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