August 18, 2005

ProTrade: crossing Moneyball with Prediction Markets

Prediction Markets By: ams

There’s a new prediction market coming soon with some interesting attributes. ProTrade is going to join the ranks of real money markets, and will concentrate on pro athletes. Their big twist on the market is that they’re going to follow the ideas of Billy Beane as presented by Michael Lewis in the book Moneyball. I’m a big fan of the book, and it seems like a wonderful basis for metrics for measuring athletes generally. ProTrade promises to develop statistics for all the major sports (starting with football, basketball, and baseball) that will actually reflect the contribution of each player to winning and losing the game.

Similar in concept to Yahoo!’s Tech Buzz game, the securities have a market price, and pay dividends as the season progresses based on the individual athlete’s on-field performance. Traders are encouraged by the dividends to ensure that the market price reflects the future stream of dividend income. I suspect that all involved understand that some traders will be buying their favorites regardless of what the statistics say, and they will help increase liquidity so that traders who care about the fundamentals will be able to continually make money.

I have some doubts that creating useful statistics is as straightforward as ProTrade makes it sound. One of the things that Lewis made clear in Moneyball was that Beane had to continually evaluate the statistics that the Sabremetricians presented to him, to figure out which ones not only described the past, but could be used as a guide to action in the future. As more coaches and athletes figure out which statistics actually correlate with success, the smart money has to find more reliable and more obscure statistics in order to maintain an edge.

I think ProTrade may have a winner here, but I won’t be putting my money on the line until they add hockey to the list. (Other sports on their coming soon list: golf, auto racing, and soccer.) I haven’t followed the big three sports recently enough to have any instincts about players to compare to the statistics. And I’m not going to learn who all the players are in order to join the game. After all, it just entertainment

Thanks for the pointer to Art Hutchinson

Addendum: Dave Porter pointed out that ProTrade seems to be play money. That’s what I thought at first, and apparently got confused while writing the post since they have FAQs on
financial matters, and on whether it is gambling. As I look again, its’s clear that it’s all play money.

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