Jan. 21, 2009 at 8:29 PM ET
Warner Independent Pictures
"Slumdog Millionaire," a film that focuses on the young winner of an
Indian "Who Wants to Be a Millionaire" contest, is the priciest pick on
the Hollywood Stock Exchange's best-picture nomination market.
Prediction markets have been spot-on when it comes to picking presidents, but the record is less stellar when it comes to movie stars. This year, the best-known Oscar prediction market largely follows the conventional wisdom on Oscar nominations. How close will the Hollywood Stock Exchange come to the actual picks? Tune in tomorrow.
The idea behind prediction markets is that people who back a particular proposition are able to put their money where their mouth is, and trade in options that pay off if the proposition comes to pass. The winner-take-all propositions could be about who's going to win the presidential election, or who's going to win the Super Bowl, or who's going to win an Oscar. If you're right, you get paid. If you're wrong, you get nothing.
Yes, it sounds like gambling ... and some offshore Web sites handle the prediction markets much as they handle traditional betting. But for two decades, the Iowa Electronic Markets have been allowed to create such real-money "markets" with the sanction of the Commodities Futures Trading Commission, as a research project for the University of Iowa. The research has shown that such markets have done a better job than polls at predicting election results. In fact, a new study based on IEM data was published just this week.
The Hollywood Stock Exchange, which is a subsidiary of the investment firm Cantor Fitzgerald, deals in play money rather than real money. Nevertheless, it has claimed a good record for predicting the Oscars. In 2007, for example, HSX traders settled on the winners in seven of the eight top Oscar categories.
Last month, Cantor Fitzgerald announced that it would offer futures contracts for domestic movie box-office receipts - which means investors would be able to put down real money on how they think movies will do. That resulted in some raised eyebrows - and a note of caution from one of the professors involved in the IEM.
The Iowa research project, like the Hollywood Stock Exchange, has offered markets to predict box-office figures for some time now, and marketing professor Tom Gruca said neither the IEM nor the HSX has been very good at the game. The average percentage error for the IEM's forecasts is 38 percent, while the equivalent predictions from the HSX have been off by 31 percent on average.
"Forecasting movies is a very difficult problem," Gruca said. "There's an enormous amount of data out there for traders to aggregate, but how do you put it all together? Nobody's learned yet how to distill all that information into a consistently accurate forecast."
Predicting Oscar nominations may be easier. Let's see how the HSX does on Thursday morning. Here are the priciest stocks in the top four categories, as rated by investors at 5:15 p.m. ET today:
Update for 11:45 a.m. ET Jan. 22: On one hand, four out of five ain't bad. On the other hand, most of the favorites for the Oscars are so locked in that it doesn't take a genius (or the wisdom of crowds) to put together a respectable list of nominees. So how well did HSX do? One way to judge is to compare its record with a real live person - namely, Newsweek's Ramin Setoodeh, a.k.a. the Gold Digger.
Correction for 11:25 a.m. ET Jan. 28: Ugh, I originally wrote that the Securities and Exchange Commission had given clearance to the Iowa Electronic Markets when it was actually the Commodities Futures Trading Commission - as I pointed out in the earlier item that I'm linking to. I should read my own stuff more closely. I've corrected the reference above.