Yahoo! Research Spot Workshop on New Markets, New Economics

Yahoo! Research Spot Workshop on
"New Markets, New Economics"

Pasadena, CA
May 5, 2004

Summary

On May 5, 2004, Yahoo! Research in Pasadena held the second in a series of Spot Workshops. Spot Workshops are informal one-day gatherings of academics and Yahoo folks centered around a common theme, sponsored by R&D.

This workshop's theme was "New Markets, New Economics". We explored a selection of specific examples of new types of markets that have emerged in recent years, and surveyed some new thinking among economists about these markets. There were three distinguished academic speakers, one internal speaker, followed by a roundtable discussion. The turnout was excellent, including several Yahoos who flew in from Sunnyvale. Audience participation was high, and feedback very positive. The invited talks were excellent and sparked a great deal of interest and enthusiasm.

Areas we examined included:

Virtual currencies. Millions of real dollars (and growing) are spent annually in exchange for virtual dollars good only within online multiplayer role playing games like Everquest or Sims Online. Why? To what extent do virtual economies mimic real economies, and how do real and virtual economies interact? What are traders' incentives?
Prediction markets. Recently, a number of markets have emerged with the primary purpose of providing more accurate forecasts of future events of interest, for example presidential election winners or international stability. Such markets currently rank among the best methods for aggregating opinions and providing accurate probability assessments. In some cases, prediction markets run entirely with virtual currency ("play money") are nearly as effective at forecasting as real-money markets.
Behavioral and experimental economics. A new breed of economics studies human behavior in controlled laboratory experiments, including violations of the standard economic assumptions of rationality. There are a variety of documented examples of irrationality among traders and inefficiency in markets. The "worth" of virtual currency is but one example. New economic theories and laboratory experiments are beginning to explain the gaps.

Speakers, Talk Information and Presentation Files

The Future of Cyberspace Economies Edward Castronova, Professor of Economics, Cal State Fullerton (Relocating to Indiana University)	presentation powerpoint file
Experimental Economics and Information Markets John Ledyard, Professor of Economics & Social Sciences, Caltech	presentation pdf file
Prediction Markets, Play Money, & Gambling Justin Wolfers, Professor of Economics, Stanford (Relocating to Wharton School of Business at University of Pennsylvania)	presentation color pdf file presentation b&w pdf file
A Dynamic Pari-Mutuel Market for Hedging, Wagering, and Information Aggregation David Pennock, Principal Research Scientist, Yahoo! Research	presentation powerpoint file publication pdf file publication ps file

Some additional details about the talks and speakers (incomplete):

The Future of Cyberspace Economies

Abstract: Synthetic worlds have emerged and generated economic forces with spillover to the real world. This talk discusses long-long-run theories about two things: 1) the likelihood that humans, in the aggregate, might spend large amounts of time in these worlds, and 2) the implications of 1) for Earth macroeconomies. Predictions stem from basic lessons in four areas: 1) the simple economics of fun, 2) the more complex economics of transaction costs as applied to communications systems, 3) the still more complex economics of fantasy and play as basic human motivations, and 4) the unfathomable economics of post-industrial cultural decline.

Thesis: The long-long-run driving force in this space is the simple fact that, for most people, the real economy is a not a very fun game at all. If its designers don't start making it a more fun game, very large numbers of people will seek substitutes. Their mass exodus will exert shock force on the real economy and everyone in it.

Edward Castronova obtained a BS in International Affairs from Georgetown University in 1985 and a PhD in Economics from the University of Wisconsin-Madison in 1991. In between, he spent 18 months studying German postwar reconstruction and social policy at universities and research institutes in Mannheim, Frankfurt, and Berlin. From 1991 to 2004, he held academic positions at University of Rochester and CSU Fullerton; beginning Fall 2004, he will be Associate Professor of Telecommunications at Indiana University. Professor Castronova has authored numerous articles in scholarly journals and is currently preparing a book on synthetic worlds for the University of Chicago Press. His paper "Virtual Worlds" is the most-downloaded economics paper at the Social Science Research Network. Professor Castronova is married and has a son. His hobbies include games and theater.

John O. Ledyard is Alan and Lenabelle Davis Professor of Economics and Social Sciences at Caltech. He was Chairman of the Division of the Humanities and Social Sciences from 1992-2002. Prior to going to Caltech in 1985, he was the Sydney G. Harris Professor of Social Science at Northwestern University where he had been since 1970. He has also held positions at Carnegie-Mellon University and Wabash College.

He received his A.B. from Wabash College where he majored in Mathematics, and his Ph.D. from Purdue University in economics in 1968. He has been a Sherman Fairchild Distinguished Scholar at Caltech. He currently serves on the editorial boards of several economics journals and has been the President of the Public Choice Society. He received an honorary degree from Purdue University in 1993 for his work in public economics. He has been a Fellow of the Econometric Society since 1977, a Fellow of the American Academy of Arts and Sciences since 1999, and a Fellow of the Public Choice Society since 2004.

Professor Ledyard has been a major contributor to the development of the principles and applications of mechanism design, a new approach to the understanding of the roles of incentives and information in organizations. His more applied work has included the development of computer-assisted markets for trading pollution rights, managing resources for spacecraft and instrument design, acquiring logistics contracts, swapping portfolios of thinly traded securities, and decision markets.

A Dynamic Pari-Mutuel Market for Hedging, Wagering, and Information Aggregation

Abstract: I will describe a new mechanism for risk allocation and information speculation called a dynamic pari-mutuel market (DPM). A DPM acts as hybrid between a pari-mutuel market and a continuous double auction with market maker (CDAwMM), inheriting some of the advantages of both. Like a pari-mutuel market, a DPM offers infinite buy-in liquidity and zero risk for the market institution; like a CDAwMM, a DPM can continuously react to new information, dynamically incorporate information into prices, and allow traders to lock in gains or limit losses by selling prior to event resolution. The trader interface can be designed to mimic the familiar double auction format with bid-ask queues, though with an addition variable called the payoff per share. The DPM price function can be viewed as an automated market maker always offering to sell at some price, and moving the price appropriately according to demand. Since the mechanism is pari-mutuel (i.e., redistributive), it is guaranteed to pay out exactly the amount of money taken in (less fees, if any). I explore a number of variations on the basic DPM, analyzing the properties of each, and solving in closed form for their respective price functions.

David M. Pennock is a Senior Research Scientist at Yahoo! Research based in Pasadena, California. Prior to joining Yahoo!, Dr. Pennock worked at NEC Laboratories America and Microsoft Research, and served as an Adjunct Assistant Professor at Pennsylvania State University. He received a B.S. in Physics from Duke University (magna cum laude), an M.S. in Computer Science from Duke, and a Ph.D. in Computer Science from the University of Michigan. He has over thirty-five publications, over twenty talks, and three patents relating to computational issues in electronic commerce and the World Wide Web, including a finalist award for best student paper. His research interests include information markets, e-market analysis, auctions, Web analysis and modeling, recommender systems, machine learning, and artificial intelligence. His research has received significant attention among e-market companies and in the media, including reports in Discover Magazine, New Scientist Magazine, the New York Times, E!Online, and CNN/Money. Dr. Pennock is a member of ACM, IEEE, AAAI, INFORMS, and AAAS. For more information, please visithttp://dpennock.com/