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

Date

July 14, 2004

Speaker

David M. Pennock

Affiliation

Yahoo! Research Labs

Overview

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.

Speakers

David M. Pennock

David M. Pennock is a Senior Research Scientist at Yahoo! Research Labs based in Pasadena, California. Prior to joining Yahoo!, Dr. Pennock worked at NEC Laboratories America, served as an Adjunct Assistant Professor at Pennsylvania State University, and interned at Microsoft Research. 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. For more information, please visit http://dpennock.com/