Quantifiable Definition of Gambling

[Hubertus Hofkirchner]

Hi Group,

A demarcation line between Information Markets and Gambling can be set
by legal definition (e.g. Tom Goodman's Legal Initiative) or by
generally accepted definition (e.g. John Maloney's Wikipedia
Initiative).

I suggest also a quantitative possibility to derive rather than define
axiomatically such a distinction. Let us call this the "Risk Reduction
Test", which comes in two variations, direct and indirect:

1. Direct - Hedging Utility: where an individual already has a
measurable risk and other parties bundle those, thus reducing the
specific risk at all sides. This is quantifiable and needs no further
explanation (e.g. consider insurance and horse racing, where the
individuals increase their exposure).
.
2. Indirect - Coordinating Utility: where an individual possesses
information which is useful to other parties by a measurable marginal
utility (in the sense of Carl Menger). The individual - by revealing
such information in a risky transaction - reduces a larger risk in
ressource allocation decisions dependent on such information. This is
quantifiable and would distinguish between "useful" information markets
(financial, science, policy, ...) and "frivolous" gambling bets (horse
racing, sports, entertainment, etc).

Best regards,

Hubertus

redmonitor.com

[David Pennock]

I like this line of thinking but I'm not sure (2) will work: for example
there are credible arguments as to why, for example, a sports bar in
Pittsburgh has a legitimate hedging interest in betting against the
Pittsburgh Steelers to advance in the NFL (US pro football) playoffs.

[Hubertus Hofkirchner]

I defend rule (2) as the sports bar's business is frivoulous in first
place.

[Chris Hibbert]

> 1. Direct - Hedging Utility: where an individual already has a
> measurable risk and other parties bundle those, thus reducing the
> specific risk at all sides. This is quantifiable and needs no further
> explanation (e.g. consider insurance and horse racing, where the
> individuals increase their exposure).

I don't understand why you'd put insurance here. The only cases I can
think of in which people who buy insurance aren't reducing their
exposure are those where buying the insurance is mandatory. Otherwise,
people buy fire insurance to reduce their exposure to the risk and cost
of recovering from fire. They buy life insurance when they believe
their heirs will be better off with insurance than with the present
value of the premiums. When a company decides that insurance costs more
than their exposure, they stop buying it. The exposure may be
unquantified before the transaction, but there's no better estimate of
the exposure than the amount of coverage that is purchased.

> I defend rule (2) as the sports bar's business is frivoulous in first
> place.

I can see holding that as a personal belief, but there's no chance that
this attitude will be enshrined in law.

This project seems like a fine direction for an interesting economic
study (with carefully defined terms that some can and some will disagree
with), but as a matter of law, it's all about some people evaluating the
trade-offs that others are making. You might be able to add protected
kinds of exchanges, but those engaging in the transactions are going to
strenuously resist dropping protections for any ongoing types of
transaction.

Chris
--
Chris Hibbert
(650)289-4054
Principal Investigator, Prediction Markets
chris....@commerce.net
http://zocalo.sourceforge.net/

[Emile Servan-Schreiber]

> I defend rule (2) as the sports bar's business is frivoulous in first
> place.

Fine, replace the sports bar with an entire country's economy. There is hardly anything better than a victory in world-cup soccer, for instance, to lift a country's consumer confidence. For instance, check out this recent link about so-called "Soccernomics":

http://business.iafrica.com/transcripts/990703.htm
What is 'soccernomics'? A German Italian final in the 2006 Soccer World Cup with Italy winning is the best case scenario for the global economy. Dutch economist Nico Klene explains "soccernomics"...

The lesson here is that you can't dismiss as "frivolous" anything that moves the hearts of millions, because that thing obviously will have some real economic impact somewhere somehow.

--Emile

--
Emile Servan-Schreiber
CEO, NewsFutures, Inc.
http://www.newsfutures.com

[Bo Cowgill]

At a panel about event futures at the most recent Futures Industry Association conference in Boca Raton Florida, Jim Overdahl, Cheif Economist for the CFTC listened as Mike Knesevitch spoke. Mike was explaining why the sports industry and related organizations need the ability to hedge risk associated with athletic performances, and made the same arguments offered on this thread.

Next, the moderator asked Jim if he thought the CFTC would approve event futures for sporting events. I can confirm the quote (and Mike perhaps you can join in), but I recall Jim saying (essentially) "No way." I think the exact quote was that it was "out of the question," but the meaning was clear. I don't think this is the final word from the CFTC, but I would trust that Jim has some insight into how the policymakers think.

There may be an economic argument that sports futures deserve to be protected because they can be used to hedge risk. However, I think prediction markets advocates should be prepared to drop it. The notion that sports futures constitutes gambling is well entrenched. I don't think it is worth the effort to change it. The sports lobby can fight that battle on its own. Personally, I would be pleased with a policy that allows real money markets on corporate events, internal corporate markets, scientific developments, and etc. but not sporting events.

Plus: What would happen if CFTC somehow did approve sporting events markets? I foresee that an opportunistic politician would see an excellent grandstanding opportunity: "The government has just legalized gambling." We'd basically see the same thing that happened with DARPA, except with CFTC. Such negative Congressional attention could jeopardize efforts to regulate less controversial event markets such as those about science, elections, social indicators and corporate events.

[Jason Ruspini]

Yes, and the CFTC is funded by the Senate and its commissioners are
appointed by the President / approved by the Senate.

The CFTC also will reject markets that allow for the hedging of
specific risks, as that would be considered insurance. I wonder, btw,
what would have happened to PAM if it had only included general index
markets.. More reasons why index markets may be more "fit" than binary
event-linked markets in many cases.

In terms of carving-out a new legal space for information markets, I
recently asked Tom W Bell about the forces he envisions pushing his <a
href="http://www.tomwbell.com/writings/PredEx.pdf">act</a> through
congress. He responded by saying that something like an avian flu
outbreak market might work, as it could prevent a public health
disaster, and shouldn't tread on the CFTC, SEC or anti-gambling police.
While that could work in terms of a story, I'm not sure what money
would be behind it. Said another way, with the profitability of
information markets still an open question, the second-degree
investment of lobbying for them might be lacking. The utility of
information that Hubertus mentioned might be substantial, but remains
unquantified.

[Hubertus Hofkirchner]

I would like to thank Bo for his extremely well-put argument about the
perils of promoting sports gambling. I strongly feel we must protect
our cause from those commercial companies who see prediction markets
just as a entry ticket into the dangerously lucrative sports bet
gambling market.

Jason's reference to a difficulty with quantifying the utilty of avian
flu informationis very valid, but not unsurmountable. I see bird flu as
a valid market by the "Risk Reduction Test" (coordinating public and
individual ressource allocation in prevention). It is a technical issue
of defining such a market well. I maintain my "Austrian Economics"
position that "Money does Matter", hence a properly designed bird flu
market would need to trade and thus quantify a measurable monetary
consequence of a bird flu outbreak.

Regarding lobbying, we may surely expect resistance from forces trying
to profit from a bird flu scare (such as the pharma industry),
promoters could be those who pay their excess profits.

Hubertus

[John Delaney]

Of course a large part of the rationale for the initial US commodity
exchanges was to provide a mechanism for farmers who had risk to manage
that risk, particularly as agriculture was so important to the economy.

I do not have comprehensive statistics, but believe that sports and
sports related business in certain jurisdictions are probably as
significant as agriculture.

A similar mechanism that has been embraced to good effect for
agricultural risk seems worthwhile for sports related risk.

Well said Email and thanks for the link. Remember the massive positive
impact
http://www.diplomatie.gouv.fr/label_france/english/SPORT/france/france.h
tml to your country France in 1998 when they won the world cup.

--Emile

http://zocalo.sourceforge.net/ <http://zocalo.sourceforge.net/>

[Jason Ruspini]

Unfortunately, in terms of the corporate culture of sports and pro
governing bodies in the US, there is also resistance to
gambling/hedging: http://www.ifhaonline.org/newsDisplay.asp?story=245

It seems like contracts on aggregate attendance would be much more
palatable, unmistakable as insurance, and speak more directly to the
business risks of franchise owners than contracts based on specific
game outcomes.

Also, I notice that Sen. Byron Dorgan is on the Subcommittee on
"Agriculture, Rural Development, and Related Agencies" which funds the
CFTC.

[Chris Hibbert]

Jason wrote:

> The CFTC also will reject markets that allow for the hedging of
> specific risks, as that would be considered insurance. I wonder, btw,
> what would have happened to PAM if it had only included general index
> markets.. More reasons why index markets may be more "fit" than binary
> event-linked markets in many cases.

Why would scaled claims raise less resistance than those with binary
outcomes? Are you saying that the congresscritters who raised a stink
about PAM would have had a harder time getting press coverage to make it
look like gambling if the payouts had been scaled? That seems like a
fairly subtle distinction compared to the sledgehammer approach used to
discredit PAM. And even in the aftermath, it would have seemed like
quibbling to claim that it wasn't gambling because of that detail.

[Jason Ruspini]

As I meant to imply by my mention of the CFTC appointers, the
hot-button phrases there were terror/assassination market. It doesn't
seem like a stretch to guess that PAM would have been less
controversial if it had only priced things like education/wealth
indicies as opposed to specific (negative) events.

[Hubertus Hofkirchner]

John,

On the agricultaral markets of the US commodity, you will agree that
individual farmers have a risk to start with. So that market passes the
proposed test ( Rule 1) with flying colours.

I do not see how a sports betting market would DECREASE individual
risk, rather it seems that many emotionally charged individuals could
be tempted into running up risk positions -> Sports clearly fail the
proposed Test 1.

The sport's bet supporters' reference to the importance of sports in
general (= entertainment value?) is not sufficient to support their
claim of beneficial information increase offsetting the individual risk
increase.

Emile & John: If you maintain that there is a quantified indirect risk
reduction surpassing the negative direct effect, please give us your
estimate. Otherwise I maintain that sports bets should be classified as
gambling and not be mixed up with information markets, just as rotten
milk should not be mixed up with cheese, culinary speaking.

Hubertus

[Hubertus Hofkirchner]

Chris, I meant that insurance passes the test. Sorry if this was
unclear. Not surprisingly, I fully agree with your argument defending
insurance.

On sports bets, you are right that this subject should not shrugged off
by expressing beliefs. So, I have answered to John below using only the
qunatifyable Test Framework proposed.

I am not sure what you mean with "protected kinds of exchanges", so
cannot answer this.

Best regards to California,
Hubertus

[heywo...@gmail.com]

Hubertus,

I recall reading that in 1921 Senator Capper was heard to liken corn
futures traders to "grain gamblers" when there was heated discussion
over the enactment of the 1922 Commodity Exchange Act.

Since then there has been a delicate distinction between voluntary risk
takers (speculators) who accept perils in the hope of profit and people
who have risk naturally (hedgers). This of course does not nullify the
fact that if a suitable mechanism existed in a suitable jurisdiction
for hedgers, speculators, and arbitragers to meet then it is likely to
be a good thing (assuming you do not agree with the inference from
Senator Capper et al - which I believe you don't). Perhaps the
insurance market helps but insurance may not be the flexible, dynamic
and efficient product that is optimal.

Now as to have a market based on sports would decrease risk. Suppose I
am the marketing manager of Nike and I have a contract to pay $X mil in
endorsements. If the 'endorser' does not do well I still have to
pay the fee. As the marketing manager I may like the ability to
dynamically manage that risk. (I do not think that Lloyds of London
will work on a Sunday to agree a bespoke insurance hedging contract
with Nike to manage the risk that Tiger underperforms in the Masters
Golf and therefore not generate the television minutes anticipated)

E.g. A few old links

Nike agrees $105 million advertising deal with Tiger.
http://www.msnbc.msn.com/id/4554944/

"The sport and recreation sector contributes 1.8 per cent of
Australia's GDP"
http://www.ausport.gov.au/fulltext/2004/wa/EconomicValue.pdf

"[Sport represents] 1¾% of all employment in the region, similar to
that for England as a whole"
http://www.sportengland.org/sporteng_nw_june03.pdf

John Delaney
CEO www.tradesports.com www.intrade.com

[Emile Servan-Schreiber]

I'm curious, what makes some of you think that US legislators would sooner make gambling relevant to policy-decision-making -- face it, that's what you are asking them to do -- than bring a measure of legality to sports betting? At least, sports betting is somewhat harmless to society as a whole, whereas you can imagine the mayhem and collective harm that may ensue, given the odorous mix of unlimited lobbying money and politics that prevails in Washington, if people were able to bet on proposed public policies or their predicted effects. The isue of manipulation, still unresolved, cannot be so easily evaded. Could it be that the reasons for keeping sports betting illegal in the US are weaker, on rational grounds, than the reasons for keeping betting out of policy-making? In any case, both seem like long shots right now, which makes this an excellent topic for a "long bet"...

Seriously, anyone who waits for real-money prediction markets to become "legal" in the States, be it for sports, corporate, or policy-decision purposes, is going to wait a long time. Those of us who care about pushing the envelope in US-based non-sports prediction markets simply have to think of more creative solutions than relying on "real money". Fortunately, the reality is that a prediction market does not need to be based on real money to generate accurate predictions -- anyone arguing otherwise, please provide data -- nor to have a viable business model.

--Emile

--
Emile Servan-Schreiber
CEO, NewsFutures Inc.
http://www.newsfutures.com

[Jason Ruspini]

I don't know anyone who is of the opinion that policy markets are
potentially less benign than sports betting. More interesting than
sports betting? Yes, at least a few people, and probably for similar
reasons -- due to their relative importance.

[David Pennock]

I completely agree with Bo's comments. Well said.

My comments were more to point out that trying to define "legitimate"
markets in any logical way, like in terms of hedging value, may not
work. I agree with Bo and others that for practical reasons
(unfortunately) we probably need/want to explicitly define "legitimate"
as pertaining to science, policy, etc. & explicitly *not* pertaining to
sports and entertainment, at least for markets in the US.

Dave

> On 4/3/06, *Emile Servan-Schreiber* <ej...@newsfutures.com

> <mailto:ej...@newsfutures.com>> wrote:
>
> > I defend rule (2) as the sports bar's business is frivoulous in first
> > place.
>
> Fine, replace the sports bar with an entire country's economy. There
> is hardly anything better than a victory in world-cup soccer, for
> instance, to lift a country's consumer confidence. For instance,
> check out this recent link about so-called "Soccernomics":
>
> http://business.iafrica.com/transcripts/990703.htm
> What is 'soccernomics'? A German Italian final in the 2006 Soccer
> World Cup with Italy winning is the best case scenario for the
> global economy. Dutch economist Nico Klene explains "soccernomics"...
>
> The lesson here is that you can't dismiss as "frivolous" anything
> that moves the hearts of millions, because that thing obviously will
> have some real economic impact somewhere somehow.
>
> --Emile
>
> --
> Emile Servan-Schreiber
> CEO, NewsFutures, Inc.
> http://www.newsfutures.com
>
>
>

> On 4/3/06, * Chris Hibbert* <ch...@commerce.net

> chris....@commerce.net <mailto:chris....@commerce.net>
> http://zocalo.sourceforge.net/
>
>
>
>
>
>
>
>
> >

[Hubertus Hofkirchner]

I agree with David on the strategy. This is precisely the way it worked
with financial markets in the last century. Stock Exchange Law simply
states that transactions on recognised exchanges are not to be
considered gambling. So the same should work with Tom Goodman´s
wording IF AND ONLY IF we get this through on whichever side of the
Atlantic.

Therefore, I am still concerned about the way to make such a legal
exemption happen which will definitely require some logical argument,
David, if only during this initial phase. The Risk Reduction Test could
provide just such a logic as IMHO sports betting fails test rule (2),
thereby avoiding the unproductive controversy depicted by Bo, earlier.

[Hubertus Hofkirchner]

On the good Senator Capper we are on the same line (as you suspected)
but definitely not on the Nike/Tiger problem.

Nike's risk position in Tiger may well be formidable, but you already
mention an important contractual mitigator: We usually sponsor athletes
at least partly based on performance. Thereby we reduce the marginal
utility of information from sports betting already.

To check the validity of the sports hedging argument, can you put some
numbers behind it? (Money Matters!)
1. How much money of more or less informed subjects would be riding on
Tiger? What is the total exposure of those gamblers?
2. How much money could Nike save by information obtained from the
sports betting crowed, assuming Tiger has a halfway intelligent lawyer?

Assuming that Exposure 1 would exceed Exposure 2 vastly, betting on
Tiger does not pass the Risk Reduction Test 2.
Ergo: Sports Betting Is Gambling. QED.

[Graham Lawlor]

I have only been cursorily following this thread, so apologies if this idea has been suggested already.

What about defining gambling as taking risk on 'zero sum' games and 'speculation' as taking risk on positive (or negative) sum games?

Graham Lawlor
Deutsche Bank
60 Wall St. - 9th Floor
New York, NY
10005-2836
212-250-7278 (O)
212-797-0773 (F)
Graham...@db.com

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[Hubertus Hofkirchner]

Does not work. Option Markets are Zero-Sum Games and I am sure your
bosses at Deutsche Bank would not appreciate you outlawing them.