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UsingPredictionMarketstoTrackInformationFlows:EvidencefromGoogle
Abstract
Inthelastthreeyears,Googlehasconductedthelargestcorporateexperimentwithprediction
marketsweareawareof.Inthispaper,weillustratehowmarketscanbeusedtostudyhowan
organizationprocessesinformation.WedocumentanumberofbiasesinGooglesmarkets,
mostnotablyanoptimisticbias.Newlyhiredemployeesareontheoptimisticsideofthese
markets,andoptimisticbiasesaresignificantlymorepronouncedondayswhenGooglestockis
appreciating.Wefindcorrelatedtradingamongemployeeswhositwithinafewfeetofone
anotherandemployeeswithsocialorworkrelationships.Theresultsareinterestinginlightof
recentresearchontheroleofoptimisminentrepreneurialfirms,aswellasrecentworkonthe
importanceofgeographicandsocialproximityinexplaininginformationflowsinfirmsand
markets.
1
Cowgill:Bcowgill@google.com.Wolfers:Jwolfers@wharton.upenn.edu.Zitzewitz(correspondingauthor):
6016RockefellerHall,Hanover,NH03755.(603)6462891.Fax:(603)6462122.Eric.zitzewitz@dartmouth.edu.
http://www.dartmouth.edu/~ericz/.TheauthorswouldliketothankGoogleforsharingthedatausedinthis
paperandSusanAthey,GaryBecker,JonathonCummings,StefanoDellaVigna,HarrisonHong,LarryKatz,Steven
Levitt,UlrikeMalmendier,KevinM.Murphy,MichaelOstrovsky,PaulOyer,ParagPathak,TanyaRosenblat,Richard
Schmalensee,JesseShapiro,KathrynShawandseminarparticipantsattheAEAmeetings,Chicago,Google,the
KaufmannFoundation,INFORMS,theNBERSummerInstitute,theStanfordInstituteforTheoreticalEconomics,
andWesleyanforhelpfulsuggestionsandcomments.ManyindividualsatGooglecontributedtoGoogles
predictionmarketsandprovidedusefulinputtoourwork.WewouldspecificallyliketothankDianaAdair,Doug
Banks,LaszloBock,ToddCarlisle,AlanEustace,PatriFriedman,RobynHarding,SusanInfantino,BillKipp,Jennifer
Kurkoski,IlyaKyrnos,PiawNa,AmitPatel,JeralPoskey,ChrisPowell,JonathanRosenberg,PrasadSetty,Hal
Varian,BrianWelle,theGoogleHRAnalyticsTeam,andthetradersinGooglespredictionmarket.
UsingPredictionMarketstoTrackInformationFlows:EvidencefromGoogle
Inthelast4years,manylargefirmshavebegunexperimentingwithinternalpredictionmarkets
runamongtheiremployees. 2 Theprimarygoalofthesemarketsistogeneratepredictionsthat
efficientlyaggregatemanyemployeesinformationandaugmentexistingforecastingmethods.
Earlyevidenceoncorporatemarketsperformancehasbeenencouraging(Ortner,1998;Chen
andPlott,2002;thispaper).
Inthispaper,wearguethatinadditiontomakingpredictions,internalpredictioncan
provideinsightintohoworganizationsprocessinformation.Predictionmarketsprovide
employeeswithincentivesfortruthfulrevelationandcancapturechangesinopinionatamuch
higherfrequencythansurveys,allowingonetotrackhowinformationmovesaroundan
organizationandhowitrespondstoexternalevents.Weexemplifythisuseofprediction
marketswithananalysisofGooglesinternalmarkets,thelargestcorporatepredictionmarket
weareawareof.
Wecandrawtwomainconclusions.ThefirstisthatGooglesmarkets,whilereasonably
efficient,revealsomebiases.Duringourstudyperiod,theinternalmarketsoverpriced
securitiestiedtooptimisticoutcomesby10percentagepoints. 3 TheoptimisticbiasinGoogles
marketswassignificantlygreateronandfollowingdayswhenGooglestockappreciated.
Securitiestiedtoextremeoutcomeswereunderpricedbyasmallermagnitude,andfavorites
werealsooverpricedslightly.Thesebiasesinpriceswerepartlydrivenbythetradingofnewly
hiredemployees;Googleemployeeswithlongertenureandmoreexperiencetradinginthe
marketswerebettercalibrated.Perhapsasaresult,thepricingbiasesinGooglesmarkets
2
ApartfromGoogle,firmswhoseinternalpredictionmarketshavebeenmentionedinthepublicdomaininclude
AbbottLabs,ArcelorMittal,BestBuy,Chrysler,Corning,ElectronicArts,EliLilly,FritoLay,GeneralElectric,Hewlett
Packard,Intel,InterContinentalHotels,Masterfoods,Microsoft,Motorola,Nokia,Pfizer,Qualcomm,Siemens,and
TNT.Ofthefirmsforwhichweknowtheroughsizeoftheirmarkets,Googlesarebyfarthelargestintermsof
boththenumberofuniquesecuritiesandparticipation.
3
InGooglesmarkets,asinmanyothercorporatepredictionmarkets,participantsbeginwithanendowmentof
artificialcurrency(calledGooblesinGooglescase).Participantscanusethiscurrencytopurchasesecurities
thatpayoffinGooblesifaspecifiedeventoccurs.Whilewefollowtheacademicliteratureandusetheterms
purchaseandsecurityindescribingGooglesmarkets,itisimportanttonotethatlegallyGoogleemployeesare
nottradingsecuritiesasdefinedundersecuritieslawsinthattheyarenotplacingrealmoneyatrisk.
declinedoveroursampleperiod,suggestingthatcorporatepredictionmarketsmayperform
betterascollectiveexperienceincreases.
Thesecondconclusionisthatopinionsonspecifictopicsarecorrelatedamong
employeeswhoareproximateinsomesense.Physicalproximitywasthemostimportantof
theformsofproximitywestudied.Physicalproximityneededtobeextremelycloseforitto
matter.Usingdataonthepreciselatitudeandlongitudeofemployeesoffices,wefoundthat
predictionmarketpositionsweremostcorrelatedamongemployeessharinganoffice,that
correlationsdeclinedwithdistanceforemployeesonthesamefloorofabuilding,andthat
employeesondifferentfloorsofthesamebuildingwerenomorecorrelatedthanemployeesin
differentcities. 4 Googleemployeesmovedofficesextremelyfrequentlyduringoursample
period(intheUS,approximatelyonceevery90days),andweareabletousetheseoffice
movestoshowthatourresultsarenotsimplytheresultoflikemindedindividualsbeingseated
together.
Otherformsofproximitymatteredtoo.Googleemployeeswhohadworked
concurrentlyonthesameproject,reviewedeachotherscode,orwerewithin12stepsonthe
organizationalcharthadmorecorrelatedtrading.Mostmeasuresofdemographicsimilarity
(wechecked8measures)werenotassociatedwithhigherpositioncorrelations,butsharing
nativespeakingabilityinEnglishoracommonnonEnglishnativelanguagewasinsome
specifications.
Theresultsaboutdemographicsnotaffectinginformationsharingsignificantlyare
interestinggiventhatparticipantsinGooglespredictionmarketsweredecidedlynot
representativeoftheorganizationasawhole.Participantsweremorelikelytobein
programmingrolesatGoogle,locatedoneitherthemain(MountainView,CA)orNewYork
campuses,and,withinMountainView,locatedclosertothecenterofcampus.Inaddition,
participationwashigheramongthosewithmorequantitativebackgrounds(asevidencedby
undergraduatemajororaptitudetestscores)andmoreinterestineitherinvestingorpoker(as
4
Asdiscussedbelow,inalldataanalyzedbytheexternalresearchersonthisproject,Googleemployeeswere
anonymizedandidentifiedonlybyanID#thatwasusedtolinkdatasets.
evidencedbyparticipationonrelatedemaillists).Thefactthattradingpositionswerenot
correlatedalongmostofthesedimensions(physicalgeographybeingtheexception)suggested
thatevenifthemarketparticipantswerenotrepresentativeofGoogle,thepeopletheywere
sharinginformationwithmightbemoreso.
Theseresultscontributetothreequitedifferentliteratures:ontheroleofoptimismin
entrepreneurialfirms,onemployeecommunicationinorganizations,andonsocialnetworks
andinformationflowsamonginvestors.DeMezaandSouthey(1996)arguemanyofthe
stylizedfactsaboutentrepreneurshipareconsistentwithanentrepreneurscurseinwhich
firmsarestartedbythosemostoverlyoptimisticabouttheirprospects.Evidencefrom
experimentsandthefield(CramererandLovallo,1999;Arabsheibani,et.al.2000;Simonand
Houghton,2003;Astebro,2003)suggestthatentrepreneursareindeedoptimisticallybiased.A
modestoptimisticbiasmaybeadesirableforbothleadersandemployeesinentrepreneurial
firms,however,ifitgeneratesmotivation(BenabouandTirole,2002and2003;Compteand
Postlewaite,2004),leadstorisktakingthatgeneratespositiveexternalities(Bernardoand
Welch,2001;GoelandThakor,2007),ormakesemployeescheapertocompensatewithstock
options(OyerandSchaefer,2005).Wecontributetothisliteraturebydocumentingoptimism
amongtheemployeesofanimportantentrepreneurialfirm,aswellasbyshowingastronglink
betweenoptimisticbiasandrecentstockmarketperformance.
Communicationbetweenmanagersandworkersandamongpeershaslongbeen
viewedasanimportantdeterminantofoptimalorganizationalstructure(Boltonand
Dewatripont,1994;HarrisandRaviv,2002;Dessein,2002),withimprovementsin
communicationtechnologymakingmoreefficientstructurespossible(Chandler,1962and
1990;RajanandWulf,2006).Mostworkongeographyandcommunicationwithinfirmsor
teamshasstudiedintercitycollaboration,findingthatgeographysimportanceappearstohave
declinedwithcommunicationcosts(e.g.,Kim,Morse,andZingales,2007),althoughtimezone
differencesstillmatter(e.g.,OLearyandCummings,2007).
Despiterathersignificantadvancesincommunicationtechnology,manyinnovative
firmsandtheiremployeespaysignificantlyhighercoststoclusterinplaceslikeSiliconValley
andNewYorkanddevotegreatcaretothephysicallayoutoftheiroffices,suggestingthat
microgeographymaystillbeimportant.Theacademicstudyofofficelayouts,communication,
andinnovationwaspioneeredbyAllen(1970),whofoundphysicallocationandinformal
relationshipstobeimportantdeterminantsofinformationsharingamongengineers.The
lessonsoftheliteratureinformedGoogleCEOEricSchmidtandChiefEconomistHalVarians
(2005)thirdruleformanagingknowledgeworkers:PackThemIn.Indeed,thefactthat
Googleemployeesmovedsofrequentlyduringoursampleperiodsuggeststhatconsiderable
thoughtisputintooptimizingphysicallocations.Tothisliterature,whichhaslargelyreliedon
retrospectivesurveystotrackcommunication,weillustratehowpredictionmarketscanbe
usedashighfrequency,marketincentivizedsurveystotrackinformationflowsinrealtime.
Finally,ourworkrelatestoarecentliteratureongeography,socialnetworksand
investing.CovalandMoskowitz(1999,2001)findthatfundmanagersoverweightlocalfirms
andearnahigherreturnontheseholdings.Hong,Kubik,andStein(2004,2005)findwithincity
correlationsinthetradingoffundmanagers.MassaandSimonov(2005)findcorrelationsin
thetradingofinvestorswithsimilareducationalbackgrounds,whileCohen,Frazzini,andMalloy
(2007)findthatfundmanagersoutperformwheninvestinginfirmswithboardmemberswho
attendedthesameeducationalinstitution.Unlikemanyofthesestudies,wehavemuchmore
detaileddataontheextenttowhichanytwoindividualsinteractandcantesttherelative
importanceofphysicalproximityandsocialnetworks.Inoursettingatleast,wefindthe
formertoplayasignificantlylargerroleininformationsharingthanthelatter.
ThenextsectiondescribesourdataandanalyzestheefficiencyofGooglesinternal
markets,documentingtheoptimism,extremenessaversion,andfavoritebiasesdiscussed
above.Thefollowingsectiondiscussesouranalysisoftradingcorrelationsandtheflowof
information.Adiscussionfollows.
Data
Thedatausedinouranalysiswascollectedinanonymizedformatfromavarietyofdifferent
internalGooglesources.WemadeuseofGooglesdataaboutemployeesofficelocationsand
adatabaseofofficemoves.ForfourofGooglesU.S.campuses(MountainView,CA;NewYork,
NY;Phoenix,AZ;Kirkland,WA),thisdataincludesthepreciselatitudeandlongitudeofthe
offices.OuranalysisalsousedtheresultsofaninternalApril2006surveyaboutemployee
backgroundsandsocialnetworks,andanonymizedrecordsofcodereviews,project
assignments,emaillistmemberships,andreportingrelationships.Alldataweusedwas
summarizedand/oranonymizedbeforeanalysis.
GooglespredictionmarketswerelaunchedinApril2005.Themarketsarepatternedon
theIowaElectronicMarkets(Berg,et.al.,2001).InGooglesterminology,amarketasksa
question(e.g.,howmanyuserswillGmailhave?)thathas25possiblemutuallyexclusiveand
completelyexhaustiveanswers(e.g.,FewerthanXusers,BetweenXandY,andMorethan
Y).Eachanswercorrespondstoasecuritythatisworthaunitofcurrency(calledaGooble)if
theanswerturnsouttobecorrect(andzerootherwise).Tradeisconductedviaacontinuous
doubleauctionineachsecurity.AsontheIEM,shortsellingisnotallowed;traderscaninstead
exchangeaGoobleforacompletesetofsecuritiesandthenselltheonestheychoose.
Likewise,theycanexchangecompletesetofsecuritiesforcurrency.Thereisnoautomated
marketmaker,butseveralemployeesdidcreaterobotictradersthatsometimesplayedthis
role.
Eachcalendarquarterfrom2005Q2to2007Q3about2530differentmarketswere
created.ParticipantsreceivedafreshendowmentofGoobleswhichtheycouldinvestin
securities.Themarketsquestionsweredesignedsothattheycouldallberesolvedbytheend
ofthequarter.Attheendofthequarter,Goobleswereconvertedintoraffleticketsandprizes
wereraffledoff.Theprizebudgetwas$10,000perquarter,orabout$25100peractivetrader
(dependingonthenumberactiveinaparticularquarter).Participationwasopentoactive
employeesandsomecontractorsandvendors;outof6,425employeeswhohadaprediction
marketaccount,1,463placedatleastonetrade. 5
Table1providesanoverviewofthetypesofquestionsaskedinGooglesmarkets.
Commontypesofmarketsincludedthoseforecastingdemand(e.g.,thenumberofusersfora
product)andinternalperformance(e.g.,aproductsqualityrating,whetheraproductwould
leavebetaontime).Muchsmallerscaleexperimentsintheseusesofpredictionmarketshave
beendocumentedatothercompanies(e.g.,byChenandPlott,2002andOrtner,1998,
respectively).Marketswerealsorunoncompanynewsthatdidnotdirectlyimplyperformance
(e.g.,willaRussiaofficeopen?)andonfeaturesofGooglesexternalenvironmentthatmight
affectitsplanning(e.g.,themixofhardwareandsoftwareusedtoaccessGoogle).
Inaddition,about30percentofGooglesmarketsweresocalledfunmarkets
marketsonsubjectsofinteresttoitsemployeesbutwithnoclearconnectiontoitsbusiness
(e.g.,thequalityofStarWarsEpisodeIII,gasprices,thefederalfundsrate).Otherfirms
experimentingwithpredictionmarketsthatweareawareofhaveavoidedthesemarkets,
perhapsoutoffearofappearingunserious.Interestingly,wefindthatvolumeinfunand
seriousmarketsarepositivelycorrelated(atthedaily,weekly,andmonthlyfrequencies),
suggestingthattheformermighthelpcreate,ratherthancrowdout,liquidityforthelatter.
Table2providessummarystatisticsontheparticipantsinGooglespredictionmarkets.
Asnotedabove,participantsarenotrepresentativeofGoogleemployeesasawhole:onmany
dimensions,theyareclosertothemodalemployeethanthemean.Theyaremorelikelytobe
programmers,asmeasuredbybeingintheEngineeringdepartment,havingparticipatedina
codereview,orhavingmajoredinComputerScience.Acrossseveralmeasures,theyaremore
quantitativelyandstockmarketoriented(morelikelytobeinaquantitativerole,havea
quantitativedegree,orparticipateoninvesting,economics,orpokerrelatedemaillists).They
aremorelikelytobebasedinGooglesMountainViewandNewYorkcampuses.Within
5
Bywayofcomparison,GoogleislistedinCOMPUSTAThashaving5,680and10,674employeesattheendof
calendaryears2005and2006,respectively.Weexcludedfromouranalysesasmallnumberoftradesthatwere
placedafteraneventhappened(butbeforethemarketwasclosedandexpired)orwereselftrades(which
resultedfromthefactthatthesoftwareallowedtraderstobematchedwiththeirownlimitorders).
MountainView,theyaremorelikelytohaveofficesclosetothecenterofcampus.Theyhave
beenemployedlonger,arelesslikelytoleaveafteroursampleends,andaremoredeeply
embeddedintheorganizationacrossanumberofmeasures(theysubscribetomoreemaillists,
namemoreprofessionalcontacts,andaremorelikelytohavebeennamedbysomeoneat
Googleasafriend).Theyarealsoslightlymoresenior(asmeasuredbylevelsfromtheCEO)
thannonparticipants.RegressionspredictingparticipationinTable3largelyconfirmthese
resultsinamultivariatecontext.
TheEfficiencyofGooglesMarkets
Googlespredictionmarketsarereasonablyefficient,butdidexhibitfourspecificbiases:an
overpricingoffavorites,shortaversion,optimism,andanunderpricingofextremeoutcomes.
Newemployeesandinexperiencedtradersappeartosuffermorefromthesebiases,andas
marketparticipantsgainedexperienceoverthecourseofoursampleperiod,thebiasesbecome
lesspronounced.
Asimpletestofapredictionmarketsefficiencyistoaskwhether,whenasecurityis
pricedatX,itpaysXinexpectation.InFigure1,wesorttradesintheGooglemarketsinto20
binsbasedontheirprice(05,510,etc.)andplottheaveragepriceandultimatepayoff.The
standarderrorsfortheaveragepayoffofabinareadjustedforclusteringofoutcomeswithina
market. 6 Theresultssuggestaslight(andmarginallystatisticallysignificant)overpricingof
favoritesandunderpricingoflongshots.Figure2conductstheanalysisseparatelyfor2and5
outcomemarkets(whichaccountfor29and57percentofthemarkets,respectively).Thetwo
outcomemarketsexhibitpositivereturnsforsecuritiespricedbelow0.5,whilethefive
outcomemarketsexhibitpositivereturnsforsecuritiespricedbelow0.2,confirmingthata
reversefavoritelongshotbiasisausefulwayofcharacterizingthispredictability.
6
Clusteringstandarderrorsbymarketallowsforanyrelationshipintheerrortermsofobservationsfromthe
samemarket.Inourcase,returnstoexpiryfordifferenttradesofthesamesecuritywillbepositivelycorrelated,
whilereturnstoexpiryfordifferentsecuritieswillbenegativelycorrelated.MonteCarlosimulationsinZitzewitz
(2008)findthatclusteringstandarderrorsofgroupsofrelatedderivativesproducesuniformlydistributedpvalues
underthenullhypothesis.
Table4presentsregressionsofreturnstoexpiryonthedifferencebetweenthe
transactionpriceand1/N(whereNisthenumberofoutcomes).Weusethisfunctionalform
fortworeasons:1)thedifferencebetweenpriceand1/Ncapturestheextenttowhicha
contractisafavoriteand2)thenonparametricanalysisinFigure2suggeststhatthisform
woulddescribethedatawell.Theseregressionsprovidestatisticallysignificantevidenceofa
reversefavoritelongshotbias(orfavoritebias,forshort).Thebiasispresenttoaroughlyequal
extentinsubsamplesofthedata(2and5outcomemarkets;funandseriousmarkets).Since
theseresultscouldbedrivenbymicrostructuredrivennoiseinprices(e.g.,duetobidask
bounce),werepeatthesetestsusinglaggedprices,bidaskmidpoints,andafterlimitingthe
sametotradesconductedinsidethearbitragefreebidaskspread. 7 Thefavoritebiasisrobust
tothesealternativespecifications.
ThepresenceofafavoritebiasissomewhatsurprisinginlightofAli(1977)andManskis
(2006)theoreticalanalysis,aswellastheevidenceofalongshotbiasinpublicprediction
markets(Tetlock,2004;Zitzewitz,2006;Leigh,Wolfers,andZitzewitz,2008).AliandManski
pointoutthatbecausetraderscantakelargerpositionsforagivenamountofdownsiderisk
whenbettingonlongshots,whentradersareliquidityconstrained(andriskneutral),weshould
expectthepricesoflongshots(favorites)tobeabove(below)themedianprobabilitybelief.If
medianprobabilitybeliefsareunbiased,thisshouldresultinalongshotbiasinprices.Given
thattheseassumptionsofliquidityconstraintsandriskneutralityseemmorelikelytoholdfora
corporatepredictionmarketthanforapublicpredictionmarket,especiallyonelikeIntrade.com
whereaccountsizesarenotconstrained,thismakesthefindingofafavoritebiasinGoogles
marketsparticularlysurprising.Onepossibilityisthatthefavoritebiasinpricesreflectsalarger
favoritebiasinthebeliefsofthemediantrader.
7
InanIEMstylepredictionmarket,onecanincreaseonesexposureagivensecuritybyeitherpurchasingthe
securityorbyexchanging$1forabundleofsecuritiestrackallpossibleoutcomesinagivenmarketandthen
sellingtheothercomponentsofthebundle.Wecalculatethearbitragefreeaskasthecheapestwayof
acquiringthesecurity,i.e.theminimumoftheaskforthesecurityandoneminusthesumofthebidsfortheother
securities.Wedotheanalogouscalculationtodeterminethearbitragefreebid.Thearbitragefreemidpointis
theaverageofthearbitragefreebidandask.For70of70,706trades,thepretradearbitragefreeaskwas
actuallybelowthearbitragefreebid,implyingthattherewasanarbitrageopportunitytoeitherbuyorsellall
securitiesinabundle.Inthesecases,wealsousedthemidpointasanindicatorofthesecuritiesvalue.
Table5calculatesreturnsfrompurchasingsecurities,whicharenegativeand
statisticallysignificantonaverage.Thissuggestssometradersmaybeadversetoshortselling
securities.Asfurtherevidenceofshortaversion,inorderbooksnapshotscollectedeachtime
anorderwasplaced,wefound1,747instanceswherethebidpricesofthesecuritiesina
particularmarketaddedtomorethan1,implyinganarbitrageopportunity(frombuyinga
bundleofsecuritiesfor$1andthensellingthecomponents).Inconstant,wefoundonly495
instanceswheretheaskpricesaddedtolessthan1(implyinganarbitrageopportunityof
buyingthecomponentsofabundleforlessthan$1andthenexchangingthebundle).
Table5alsocalculatesreturnsaccordingtowhetherthesecuritysoutcomewouldbe
goodnewsforGoogle.Forsomemarkets,suchasmarketsonfunorexternalnewstopics,
itwasnotclearwhichoutcomewasbetterforGoogle,soweareabletorankoutcomesfor157
outof270markets.Ofthese157,allbut11haveeither2or5outcomes,andso,forsimplicity,
thetablerestrictsattentiontothese.Intwooutcomemarkets,theoptimistic(i.e.betterfor
Google)outcomeissignificantlyoverpriced:ittradesatanaveragepriceof46percentbut
thesetradesearnaveragereturnstoexpiryof26percentagepoints.Thepessimisticoutcome
isunderpricedbyasimilarmargin.Fiveoutcomemarketsdisplayasmallamountofoptimism
biasbutprimarilyanoverpricingofintermediateoutcomes;thethirdbestoutcomeoutoffive
ispricedat30butearnsreturnstoexpiryof12percentagepoints. 8 Werefertothisbiasas
extremeaversion.
Table6measurestheextentoftheoptimismbiasinsubsamplesofthedata.The
optimisticbiasexistsentirelyinthetwocategoriesofcontractswhereoutcomesaremost
directlyunderthecontrolofGoogleemployees:companynews(e.g.,officeopenings)and
performance(e.g.,projectcompletionandproductquality).Marketsondemandandexternal
newswithimplicationsforGooglearenotoptimisticallybiased.Optimisticbiasislargerintwo
outcomemarkets,earlyinoursampleperiod,andearlierineachquarter.
8
AlltheaveragesinFigure1andTables46aretraderatherthancontractweighted.Ifacontractsfutureprice
pathiscorrelatedwithwhetherittradesinthefuture,contractweightedanalysisofefficiencycansufferfroma
lookaheadbias.
Table7providestestsforwhetherthesebiasesareindependentofoneanother,finding
thattheylargelyare.ThefinalcolumninTable7interactsthefourbiases(optimism,favorite
bias,extremeaversion,andshortaversion)withadatevariable(scaledtoequal0atthe
beginningofoursampleonApril7,2005and1attheendonSeptember30,2007).The
coefficientsontheseinteractionssuggestthatGooglesmarketsbecamesignificantlyless
biasedoverthecourseofoursampleperiod.InthefinalcolumnofTable7,wefindthat
weightingtradesbythenumberofsharestransacted,ratherthanequally,reducesthe
estimatedmagnitudeofthebiases.
Threeofthefourbiases(optimism,extremeaversion,andfavoritebias)couldreflectex
postsurpriseratherthanexantebiasesinbeliefs:Googlesoutcomesduringthistimeperiod
couldsimplyhavebeenmoredisappointing,moreextreme,andhardertopredictthanrational
tradersanticipated.Googlesstockpricemorethantripledduringourtimeperiod(April2005
toSeptember2007),castingdoubtonanegativeexpostsurpriseastheexplanation.
Furthermore,mostoftheappreciationoccurredduring2005,theperiodinwhichtheapparent
optimisticbiasinGooglesmarketswasgreatest.
Furtherevidencethatthereisabehavioralcomponenttotheoptimismcomesfrom
Table8,whichexamineshowtheoptimisticbiasinGooglesmarketsvarieswithveryrecent
Googlestockreturns.CowgillandZitzewitz(2008)reportthatemployeejobsatisfactionis
higherondaysthatGooglestockappreciates,thatthiseffectlastsoneortwodays,andthat
appreciationisaccompaniedbylowerworkeffortandtoughergradingofjobcandidatesand
ideas.Inthispaper,wefindthattheoverpricingofoptimisticsecuritiesinGooglesprediction
marketsbecomesmorepronouncedondaysGooglestockappreciates.
Thecoefficientof10.5incolumn1canbeinterpretedasshowingthat,onaverage,
optimisticsecuritiesearnreturnstoexpirythatare10.5percentagepointslowerthanneutral
securities.Thecoefficientof2.2ontheinteractionofoptimismandpriordayreturnsimplies
thatthispricingbiasis4.4percentagepointslargerfollowingadaywith2.0percenthigher
Googlestockreturns(onestandarddeviationduringthistimeperiod).Furthertestsrevealthat
thispricingbiasappearstomeanrevertafteronedayandisrobusttocontrollingfordayofthe
10
weekeffectsandthereturnsontheS&P500andNasdaqcomposite. 9 Evidenceofanimpactof
stockpricemovementsontheoptimismbiaspersistswhenwevolumeweight,ratherthan
equalweight,trades.
Whoisdrivingthesebiases?Ifwepredictwhetheratraderwilltradewithoragainst
thesebiasesusingtheindividualcharacteristicsinTable9,wefindseveralrelationships.Newly
hiredemployeesaresignificantlymorelikelytotakeoptimisticpositionsthanotheremployees.
Infurthertestsomittedforspacereasons,wefindthatthisisespeciallytrueforcontractsinthe
PerformanceandCompanyNewscategoriesinwhichpricesareoptimisticallybiasedon
average.Ontheotherhand,newlyhiredemployeesaremorelikelytosellfavoritesandto
buildpositionsbysellingratherthanpurchasingsecurities,i.e.totradeinawaythattakes
advantageofthereversefavoritelongshotandshortaversionbiasinprices.Codersarelike
neweremployeesinthattheytradeoptimistically(whichlowerstheirreturns),butalsotradein
awaythattakesadvantageoffavoriteandshortaversionbiases.Moreexperiencedtraders
tradeinawaythatprofitsfromoptimism,favorite,andshortaversionbiases,butcontributes
toextremeaversion.10
Insummary,whileGooglespredictionmarketsgrewmoreefficientovertime,theydid
exhibitpricingpredictabilitiesduringoursampleperiod.Thesepricingpredictabilitieslikely
arisefromshortaversion,aswellasfromoptimistic,extremenessaversion,andfavoritebiases
inthemarketweightedaveragebeliefsofGooglesemployees.Tobetterunderstandhow
Googleprocessesinformationasanorganization,weturntothequestionofwhetherwecan
useitspredictionmarketstounderstandhowinformationmovesaroundtheorganization.
MeasuringtheFlowofInformation
9
Theunderpricingofextremeoutcomesandlongshots,incontrast,isnotstatisticallysignificantlyrelatedtothe
signormagnitudeofpriorstockdayreturns.
10
OnetraderinGooglesmarketswroteatradingrobotthatwasextremelyprolificandendedupparticipatingin
abouthalfofalltrades.Manyofthesetradesexploitedarbitrageopportunitiesavailablefromsimultaneously
sellingallsecuritiesinabundle.Inordertoavoidhavingthistraderdominatethe(tradeweighted)resultsinTable
9,weincludeadummyvariabletocontrolforhimorher.Noneoftheresultsdiscussedintheaboveparagraph
aresensitivetoremovingthisdummyvariable.
11
Inthissectionweaimtounderstandhowinformationandopinionsaresharedbytesting
whetheremployeeswhoareproximatetoeachothertradeinacorrelatedmanner.We
developmeasuresofgeographical,organizational,andsocialproximity,andalsomeasure
demographicsimilarity.
Ouranalysisaimstounderstandwhichofthesemeasuresofproximityisrelatedto
correlationsininformationandopinion,asexpressedinpredictionmarkettrading.Wefollow
anapproachsimilartothepriorstudiescitedabovethattestforcommunicationinsecurities
markets,inthatwetestforcorrelationsbetweenthetradingandpriorpositionsofthosewho
areproximatealongsomedimension.Wedesignourapproachtotakeintoaccountofthefact
thatwearetestingtherelativeimportanceofalternativeformsofproximity,thatwehave
tradebytraderatherthanquarterlyholdingsdata,andthatourmarketsarecomparatively
shortlived.
Inordertotakemaximumadvantageofourdata,weconductouranalysisatthetrade
level.Inmostofourtests,wetaketheparticipantsineachtradetobeexogenous,andusethe
priorpositionsofproximatecolleaguestopredictthesizeanddirectionofthetrade.Our
rationaleforthisapproachisbothsimplicityandthefactthatexacttimingofindividualstrades
inalowstakespredictionmarketislikelytobeexogenous,sinceitwouldbelargelydetermined
bywhentheyhavetimeavailable(e.g.,foraprogrammer,whilecodeisbeingcompiledand
tested),butthedirectionandsizeoftheirtradesisofcoursenotlikelytobe.
Giventhelikelyabsenceofhedgingmotivesinthesemarkets,iftraderibuysasecurity
fromtraderjatsomeprice,wecaninferthatissubjectivebeliefaboutitspayoffprobabilityis
higherthanjs.Equally,ifathirdtraderkholdsalargelongpositioninthesecuritypriortothe
trade,wecaninferthathersubjectivebeliefaboutthevalueofthesecurityishigherthanifshe
wereholdingashortposition.Ourapproachwillbetotestwhetherthebuyerinaparticular
transactionismoreproximatetoothertraderswithpriorlongpositions.
Specifically,wewillestimateisdesiredholdingsofsecuritysatprevailingmarketprices,
,where istheweightthatigivestheopinionofk, is
12
avectorofmeasuresoftheproximity/similarityofiandk, isavectorofparameterstobe
estimated, isanerrortermcapturingthecomponentofisopinionaboutsthatisnot
affectedbyhercolleagues,and isanerrortermcapturingtheinfluenceofkonithatisnot
duetotheirproximity. 11 Giventhissetup,wecanpredictthedifferenceintheirholdingsafter
thetradeas:
. (1)
Itisconvenienttorewritethisas:
, (2)
Theidentifyingassumptioninestimating(2)isthestandardassumptionthattheerror
term(inparentheses)isuncorrelatedwiththeindependentvariable(theproximityweighted
positionsofcolleagues).Inthiscontext,thisrequiresassumingthattheportionofthetraders
opinionthatisnotinfluencedbytheirproximatecolleagues(i.e.,ei)isuncorrelatedwiththe
positionsoftheirproximatecolleagues( ).Inaddition,itrequiresassumingthat
proximatecolleaguesarenotunexpectedlyinfluentialinwaysthatareuncorrelatedwiththeir
proximity(i.e.,thatnikisuncorrelatedwithsik,whenweightedbytheqik).
Thefirstassumptionrequiresthatlikemindednessforotherreasonsnotbecorrelated
withproximity.Thisseemsunlikely,giventhatgeographicandorganizationalproximityis
optimizedbythefirm,thatsocialproximitydevelopsendogenously,andthatdemographical
similaritymaybecorrelatedwithlikemindednessevenintheabsenceofcommunication.We
willthereforecarefullyexaminetherobustnessofourresultstotheinclusionandexclusionof
11
WolfersandZitzewitz(2007)findthattradersdemandforabinarypredictionmarketsecurityislinearintheir
subjectiveexpectedreturnswhentheyhavelogutilityandisapproximatelylinearformostreasonable
assumptionsaboutriskaversion.
13
controlsforobservableformsofproximity.Furthermore,forgeographicproximity,wecan
exploitthefrequencyofofficemovesatGoogletoseparatetheeffectsofgeographicproximity
andlikemindednessthatmaybecorrelatedwithit.
Thesecondassumptionrequiresassumingthatourobservedmeasuresofproximityare
notcorrelatedwithunobservedproximity.Forexample,ifcolleagueswhosharedanoffice
werealsofriends,butfailedtoreportinontheirsocialnetworksurvey,wewouldincludethe
effectoftheirbeingfriendsaspartoftheeffectofsharinganoffice.Thepotentialforsuch
confoundingeffectsmustbekeptinmindwheninterpretingourresults.
Weconstructourdatasetforestimating(2)asfollows.Foreachpairofour1,463
predictionmarkettraders,wecalculatemeasuresoftheirgeographic,organizational,andsocial
proximityandtheirdemographicsimilarity.Whileourdemographicsimilaritymeasuresare
constantthroughoutourtimeperiodand,duetodatalimitations,oursocialproximity
measuresareaswell,weupdateourgeographicandorganizationalproximitymeasureseach
week. 12 AsofeachSundaymorninginoursample,weconstruct:1)acompanywideseating
chartusingourdatabaseofofficemoves,2)anorganizationalchartusingourhistoryofchanges
inreportingrelationships,and3)measuresofwhetheranytwoemployeeshadconcurrently
workedonaprojecttogetherorreviewedoneanotherscodeasoftheweekinquestion.We
thenconstructmeasuresofthegeographicandorganizationalproximityofeverypairoftraders
forthatweek.
Priortoeachtrade,wecalculatethenormalizednetpositionofeachtraderforeach
security. 13 Wethenconstructtheproximityweightedsumofcolleaguespositionsforeachof
thetwotradersalongeachdimensionofproximity.Wethenpredictthesizeanddirectionof
12
Itispossiblethatourfindingofagreaterroleforgeographicandorganizationalproximityisduetothefactthat
wehavebetterdataforthesethanforsocialconnections.Inearlierversionsofouranalysis,however,wealsoonly
hadseatingandorganizationalchartsforasinglepointintime,andyetfoundagreaterroleforgeographicaland
organizationalproximityandamorelimitedroleforsocialconnectionsanddemographics.
13
Wecalculatenetpositionsinasecurityasthedifferencebetweenatraderscumulativenetpurchasesofa
securityandtheaverageofhercumulativenetpurchasesofallsecuritiesinthatmarket.Forexample,ifthereare
twooutcomesinamarket,andtraderXhasmadenetpurchasesof20sharesofoutcomeAand10sharesof
outcomeB,wewouldcalculateherpositionsasbeing+5sharesofAand5sharesofB.Wethennormalize
positionsacrosstraderswithineachsecurityusingthestandarddeviationofpositionsatthetimeofthetrade.
14
thetradeusingtheproximityweightedcolleaguepositionsacrossthedifferentdimensionsand
thetraderspriorpositionasregressorsandincludingatradefixedeffect.Standarderrors
allowforclusteringoferrorswithinagiventraderstradesacrossallsecurities.
Table10presentsestimatesof(2).Thefirstcolumnprovidesweakevidencethatthe
traderfromthecitywithalargerpriornetpositioninaparticularsecurityismorelikelytobe
thebuyerinagiventransaction.Theregressioncontrolsforthepriorpositionsofthetraders
themselves,whichisimportanttodobecausethedirectionofatraderstradesinagiven
securityisusuallypositiveseriallycorrelated,andwedonotwanttomistakethisfora
proximityeffect.Omittingthiscontrolmakesourproximityresultsslightlystronger,while
addingcontrolsforlaggedownpositionsdoesnotmeaningfullyaffectthem.
Subsequentcolumnsaddmeasureswithnarrowerdefinitionsofproximity.Incolumn2,
weaddatermthatweightscolleaguesaccordingtotheproximityoftheirbuildingswithina
givencampus. 14 Thepositivecoefficientonthistermandthechangeinthesamecity
coefficienttozerosuggeststhattherelationshipwithsamecitycolleaguesisdrivenbythose
whoareclosetogetheroncampus.Insubsequentcolumns,weaddtermsthatcaptureonlythe
positionsofevenmoreproximatecolleagues.Ineachcase,wefindthatonlythemost
proximatecolleaguesappeartobecorrelated.Thefinalspecificationincolumn6impliesthat
thatcolleagueswhoshareanofficeorwhoseofficesarelocatedwithinafewfeetonthesame
floorarecorrelated. 15 Notethatthecoefficientscanbedirectlycompared;theytellushowto
constructanestimateofksinfluenceonI(wik)fromavectorofmeasuresoftheirproximity
(sik).
14
Weconstructbuildingproximityweightsasfollows.First,wecalculatethegeographiccenterofabuildingusing
theaverageGPScoordinatesofitsoffices.Next,weweightatraderssamecitycolleaguespositionsusinga
weightequalto100feetdividedbythedistancebetweenthegeographiccentersoftheirbuildings;thisweightis
settoonefortradersinthesamebuildingorbuildingscloserthan100feetapart(lessthan0.03%oftraderpairs
arethisclose),anditissettozerofortradersindifferentcities.Weobtainedqualitativelysimilarresultswith
alternativeapproaches,includingnumeratorsofupto500feetorusingthesquareorsquarerootofdistancein
thedenominator.Theproximityonfloortermtakesthesameapproach,weightingcolleaguesonthesamefloor
as10feetdividedbythedistancebetweentheirdesks,withamaximumofone.
15
IntheMountainViewandNewYorkcampuseswhere69and9percentoftraderssit,respectively(and76and
11percentoftradesareplaced,respectively),sharedofficesaretypicallygroupsofdesksboundedbyfivefoot
highwallsonalarge,openplanfloor.
15
Geographicinformationismissingforsometraders.Forabout8percentoftrades,we
aremissingbuildinginformationfortheweekinquestion,whileroominformationismissingfor
19percentoftrades.Manyofthesecasesinvolvedinstanceswhereanemployeedoesnot
haveanassignedlocation.Sincetheseemployeesmaybelesslikelytodevelopgeographically
drivenrelationshipsthatleadtoinformationsharing,wetreatthemdifferently,creatinga
secondtermwithaweightequaltoonethepartiesareinthesamecity,butbuilding
informationismissingforeither,andatermwithaweightequaloneiftheyareinthesame
building,butroominformationismissingforeither.Fortraderswithmissinginformation,
thesetermswillbethesumofpositionsofcolleaguesinthesamecityorbuilding,duplicating
othervariablesintheregression.Fortraderswithpositioninformation,however,theseterms
willbeequaltothepositionofcolleaguesinthesamecityorbuildingwithoutbuildingorroom
information,respectively.Whileincludingthesetermsdoesnotsignificantlyaffectthe
coefficientsontheotherterms,weincludethemsothemodelcandistinguishbetween
colleagueswithandwithoutfixedpositions.Thenegativecoefficientontheroommissing
termimpliesthatcolleagueswithnofixedlocationinabuildingarelesscorrelatedthanthe
averageoccupantwiththeirsamebuildingcolleagues.
Table11conductsasimilaranalysisusingmeasuresofsocialconnections,workhistory,
andorganizationalproximity.Wefindthatmeasuresofsocialconnections,eitherselfreported
ontheApril2006surveyorinferredfromsubscriptionstoemaillists,donotexplaintrading
correlationswell.Ahistoryofreviewingeachotherscodeoroverlappingonaprojectdoes,
however.Addingtermsthatcapturetheportionoftheorganizationoneisinreducesthe
explanatorypowerofworkhistory,andthesinglebestexplanatorisbeingwithinoneortwo
stepsontheorganizationchart(i.e.,sharingamanager,beingsomeonesmanager,orbeing
someonesmanagersmanager).AddingthegeographicalproximityvariablesfromTable10
reducestheestimatedeffectoforganizationalproximity;thisreflectsthefactthatteamsare
usuallycolocated.
16
Finally,addingcontrolsfordemographicsimilaritydoesnotmeaningfullyaffectthe
results. 16 Noneofthedemographicsimilaritytermsareconsistentlystatisticallysignificant,
withthepartialexceptionofbothbeingnativeEnglishspeakersorsharingacommonnon
Englishnativelanguageinsomespecifications. 17 Apartfromthesevariables,tradingwasif
anythingmorecorrelatedamongdissimilaremployees.
Thefactthatthecoefficientontheselfreportedfriendshiptermturnsnegativewhen
theworkhistoryandorganizationalproximityvariablesareaddedtothemodelsuggeststhat
friendshipandasharedworkhistoryarecorrelated,andthattheemployeesmostlikelytohave
correlatedtradingarethosewhoareproximateorganizationallyorgeographicallyandarenot
friends.Oneadmittedlyspeculativeinterpretationofthisresultisthatfriendshavebetter
thingstodiscussthanthesubjectsofpredictionmarkets,whilethepredictionmarketsprovide
atopicofconversationforthosewhoarenotfriends.
Table12examinestherobustnessofthegeographicproximityresultstoaddingthe
demographic,social,workhistory,andorganizationproximityvariablestothemodel.Adding
demographicsimilarityvariablesslightlyincreasestheestimateeffectofsharinganoffice,while
controllingforbeing12stepsawayontheorganizationalchartreducesthesameoffice
coefficientslightly.Thelatterchangeisagainconsistentwithmanagersdirectreportsbeing
colocated.
InTable13,weexploitthefrequencyofofficemovesand,toalesserextent,
reorganizations,toattempttoseparatecausaleffectsofproximityfromothersourcesof
correlationbetweenproximityandlikemindedness.Columns1and4repeatearlier
16
Weconstructeightmeasuresofdemographicsimilarity:sharinganundergraduatealmamaterormajor,both
beingnativeEnglishspeakers,sharingacommonnonEnglishnativelanguage,eitherbothorneitherbeingcoders
(definedasemployeeswhoparticipatedinatleastonecodereviewduringoursampleperiod),andsimilarityalong
threecommonlystudieddemographicvariables.Forthedemographiccharacteristicsthatweobtainedfroma
voluntarysurvey(undergraduateschoolandmajorandlanguagesspoken),wearemissingdatafor65percentof
ourtraders(whoaccountfor37percentofthetrades).Forpairsoftraderswhereonehasunknown
demographics,wecodethesamegroupvariablesaszero.
17
IntheApril2006survey,Googleemployeeswereaskedtolistlanguagestheyspokeandtoratetheirability
fromonetofive,with5beingnativeand4beingfluent.Allbut2percentofGoogleemployeesreportedbeingat
leastfluentinEnglish.Giventhefactthatthedifferencebetweenfluencyandnativeabilityseemedlikelytoaffect
informalcommunication,wefocusedonthisdistinctioninconstructingthevariable.
17
specifications,withoutandwithdemographicvariables,respectively.Columns2and5add13
weeklagsofthegeographicand12stepsawayvariablesgiven,andcolumns3and6add13
weekleadsofthesevariables.Noneoftheleadvariablesarestatisticallysignificant.Assuming
thatlikemindednessfornonproximityreasonsispersistent,thissuggeststhatproximityis
indeedcausingcorrelatedtrading.Atthesametime,thelaggedeffectsofsharinganofficeor
being12stepsawayareroughlyasstrongasthecurrenteffects,suggestingitmaytakeafew
monthsforproximitytoproducerelationshipsthatleadtoinformationsharing.
Table14estimatesthemodelfordifferenttypesofcontracts.Wefindthatproximityis
lessassociatedwithcorrelatedtradingformarketsonperformanceandcompanynews
subjects,whicharealsothemarketsthatexhibitastrongoptimismbias.Onepossible
explanationforthisdifferenceisthatthesesubjectsaremorepoliticallysensitive,and
thereforetradersaremorelikelytokeeptheirtruebeliefstothemselves.Wetestedfor
separatelyforproximityeffectsfromcolleagueswhoweretakingoptimistic(i.e.betting
outcomesthatweregoodforGoogle)andpessimisticpositionsandfoundnosignificant
differences.
Table15considerstherobustnessofourresultstovariationsinmethodology.Column1
repeatsasabaselinethespecificationfromTable12,column6,Table13,column4,andTable
14,column1.Thenextcolumndropscontrolsforthetradersinitialpositionsfromthemodel,
whichasmentionedabovetendstostrengthenresults.Column3usesthesumsofthesignsof
colleaguespositionsratherthannormalizedcolleaguepositionsinconstructingtheproximity
terms.Column4predicts(usingalinearmodel)thedirectionoftraderatherthanitsdirection
andnormalizedsize.Column5calculatescolleaguespositionsfrom24hoursbeforethetrade
inquestion.Ingeneralthesemodificationstothemethodologydonotaffectconclusionsabout
geographicalandorganizationalproximity,withtheexceptionofusing24hourlagged
colleaguespositions.Theweakerresultsinthisspecificationsuggestthatmuchofthesharing
ofinformationwithproximatecolleaguesmayoccurshortlyaftertradesareplaced.Thisstory
wouldagainbeconsistentwithpredictionmarkettopicsbeingatopicofcausalinterest,as
opposedtoemployeesmainjobfunction.
18
Withtheexceptionofthelastmodel,theconclusionthatgeographicandorganizational
proximityisassociatedwithcorrelatedtradingisrobusttoalternativeapproaches.Thefact
thatsignificanceislostinthelastcolumnsuggeststhatcommunicationaboutpredictionmarket
topicsandtradinghappensathighfrequency.SinceaccountsizesinGooglesmarketsare
limited,oneplausiblestoryisthattraderstakethemaximumpossiblepositionforthemselves
andthentelltheirofficeorteammatesaboutasecuritythatintheirviewremainsmispriced.
Discussion
Inthepastfewyears,manycompanieshaveexperimentedwithpredictionmarkets.Inthis
paper,weanalyzethelargestsuchexperimentweareawareof.WefindthatpricesinGoogles
marketscloselyapproximatedeventprobabilities,butdidcontainsomebiases,especiallyearly
inoursample.Themostinterestingofthesewasanoptimismbias,whichwasmore
pronouncedforsubjectsunderthecontrolofGoogleemployees,suchaswhetheraproject
wouldbecompletedontimeorwhetheraparticularofficewouldbeopened.Optimismwas
morepresentinthetradingofnewlyhiredemployees,andwassignificantlymorepronounced
onandimmediatelyfollowingdayswithGooglestockpriceappreciation.Ouroptimismresults
areinterestinggiventherolethatoptimismisoftenthoughttoplayinmotivationandthe
successofentrepreneurialfirms.Theyraisethepossibilityofastockpriceoptimism
performancestockpricefeedbackthatmaybeworthyoffurtherinvestigation.
Wealsoexaminehowinformationandbeliefsaboutpredictionmarkettopicsmove
aroundanorganization.Wefindasignificantroleformicrogeography.Thetradingof
physicallyproximateemployeesiscorrelated,andonlybecomescorrelatedaftertheemployees
begintositneareachother,suggestingacausalrelationship.Workhistoryandorganizational
proximityplayadetectable,butsignificantlysmaller,role,whilesocialconnectionsand
demographicshavelittleexplanatorypower.
Animportantcaveattoourresultsisthattheytellusaboutinformationflowsabout
predictionmarketsubjects,manyofwhichareancillarytoemployeesmainjobs.Thismay
19
explainwhyphysicalproximitymattersmorethanworkrelationshipsifpredictionmarket
topicsarelowerprioritysubjectsonwhichtoexchangeinformation,theninformation
exchangemayrequiretheopportunitiesforlowopportunitycostcommunicationcreatedby
physicalproximity.Ofcourse,introspectionsuggeststhatgenuinelycreativeideasoftenarise
fromsuchlowopportunitycostcommunication.Googlesfrequentofficemovesandemphasis
onproductinnovationmayprovideanidealtestinggroundinwhichtobetterunderstandthe
creativeprocess.
20
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23
Figure1.PricesandPayoffProbabilitiesinGoogle'sPredictionMarket
1.0
0.9
0.8
0.7
0.6
PayoffProbability
0.5
0.4
0.3
0.2
0.1
0.0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
Price
0.9
0.8
0.7
0.6
PayoffProbability
0.5
0.4
0.3
0.2
0.1
0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
Price
Tradesintwo(red)andfiveoutcome (blue)markets(22,452and42,416,respectively)aresortedinto20binsaccordingtoprice
(i.e.,05,510, etc.),andthenaveragepriceand payoffprobabilityfor thebinisplotted.DashedlinesplotregressionequationsusingOLS.
Table1.PredictionmarketsatGoogle
Averagefor
Prediction Signofdifference
Market withaveragefor
Sample AllGooglers traders allemployees Oddsratio
Jobcharacteristics
Department
Engineering A + 1.737 ***
Operations A + 1.324 ***
ProductManagement A + 1.547 ***
Sales A 0.591 ***
Other(Facilities,BusinessOperations,etc.) A 0.298 ***
Coder?(Participatedinatleastonecodereview) A + 2.554 ***
LevelsbelowCEO A ***
Hiredate(dayssince1/1/2004) A ***
Geography
Mountainviewcampus(MTV) A + 1.379 ***
MTVonly:distancefromcenterofcampus(NoNameCaf)inmiles 0.187 ***
NewYorkcampus A + 1.639 ***
Socialnetworksandinterests
Emaillistssubscribedto A 39 + ***
Economicslistparticipant A 0.02 0.08 + 3.935 ***
Financialplanninglistparticipant A 0.17 0.42 + 2.454 ***
Investinglistparticipant A 0.03 0.09 + 3.762 ***
Pokerlistparticipant A 0.03 0.12 + 3.840 ***
Codersonly:timeshadcodereviewed A 206 354 + ***
Codersonly:timesreviewedcode A 204 365 + ***
Professionalcontactsnamed B 6.65 7.07 + ***
Friendsnamed B 5.22 5.20
Peoplingnamingasprofessionalcontact B 3.95 4.01 +
Peoplenamingasfriend B 2.53 2.71 + ***
Demographicsandeducation
Undergraduatemajor
Computerscience B + 1.539 ***
Electricalengineering B + 1.133
Otherengineering/operationsresearch B 0.815
Math/Statistics B + 1.438 ***
Science B 0.959
Economics/Finance B 0.677 *
OtherBusiness B 0.537 ***
Socialscience/law B 0.513 ***
Communications B 0.507 ***
Humanities/other B 0.558 ***
Graduatedegree? B + 1.036
Notes:
ThesevalueswerewithheldattherequestofGoogle.Wemaybeabletosharemoreinalaterdraft.
AsterisksindicatethestatisticalsignificanceofthedifferencebetweenpredictionmarkettradersandallGoogleemployees.Oddsratiosaretheshareofpredictionmarket
tradersinagivencategory(e.g.,intheEngineeringDepartment),dividedbytheshareofallemployeesinthesamedepartment.
SampleA=AllpermanentemployeesandinternsemployedbetweenApril2005andSeptember2007,excludingthoseworkingatremotelocations
SampleB=SampleAmemberswhorespondedtoaSpring2006survey(3,139,inclduing510predictionmarkettraders)
Table3.Linearprobabilityregressionspredictingparticipation
Dependentvariable =1ifeverplacedtrade
Department
Engineering 0.074 *** 0.042 *** 0.031 *** 0.010
(0.003) (0.003) (0.003) (0.031)
Sales 0.053 *** 0.034 *** 0.026 *** 0.065 *
(0.006) (0.006) (0.006) (0.037)
Operations 0.064 *** 0.049 *** 0.024 *** 0.014
(0.009) (0.009) (0.008) (0.037)
ProductManagement 0.015 *** 0.022 *** 0.011 *** 0.054 **
(0.002) (0.004) (0.004) (0.022)
Coder?(Participatedincodereview) 0.066 *** 0.025 *** 0.004
(0.005) (0.005) (0.026)
Level(DistancefromCEO) 0.002 0.001 0.016 **
(Range=1to7) (0.001) (0.001) (0.007)
Hiredate 0.010 *** 0.013 *** 0.009
(Inyears) (0.001) (0.002) (0.006)
NYCbased 0.021 *** 0.015 * 0.006
(0.008) (0.008) (0.027)
MountainView(MTV)based 0.016 *** 0.015 *** 0.016
(0.004) (0.004) (0.025)
DistancetoNonameCafinmiles(0ifnonMTV) 0.031 *** 0.035 *** 0.012
(Mean=0.1,SD=0.2,Max=1.1) (0.010) (0.010) (0.044)
Emaillistssubscribedto(/100) 0.154 *** 0.246 ***
(0.013) (0.038)
Economicslist? 0.140 *** 0.159 ***
(0.034) (0.050)
Financialplanninglist? 0.059 *** 0.026
(0.013) (0.022)
Investinglist? 0.108 *** 0.126 **
(0.035) (0.053)
Pokerlist? 0.155 *** 0.163 ***
(0.028) (0.045)
Undergradmajor=CS,EE,Math,orScience 0.045 **
(0.020)
Undergradmajor=EconomicsorBusiness 0.003
(0.015)
Sample A A A B
Meanofdependentvariable 0.051 0.051 0.051 0.174
PvalueofFstat 0.0000 0.0000 0.0000 0.0000
Notes:
Column4alsoincludescontrolsfordemographiccharacteristics.Standarderrorsareheteroskedasticityrobust.
SampleA=AllpermanentemployeesandinternsemployedbetweenApril2005andSeptember2007,excludingthoseworkingat
remotelocations
SampleB=SampleAmemberswhorespondedtoaSpring2006survey(3,139,inclduing510predictionmarkettraders)
Table4.Reversefavoritelongshotbias
Dependentvariable:returnstoexpiry
Note:Eachrowisaregression.Standarderrorsareheteroskedasticityrobustandadjustforclusteringofoutcomeswithinmarkets.Currentlyquote
informationisnotavailableformarketsfrom2007Q2and2007Q3,sotheseareexcludedfromthebottompanel.
Table5.OptimisticbiasintheGooglemarkets
Notes:Standarderrorsareheteroskedasticityrobustandadjustforclusteringofoutcomeswithinmarkets.
Table6.Optimismbiasbysubsample
Dependentvariable:returnstoexpiry
Independentvariable:optimismofsecurity(scaled1to1)
Notes:Eachrowisaregression.Standarderrorsareheteroskedasticityrobustandadjustforclusteringofoutcomeswithinmarkets.
OptimismisscaledsothattheworstoutcomeforGoogleiscoded1andthebestiscoded1.I.e.,(1,1),(1,0,1),(1,0.33,0.33,1),and(1,
0.5,0,0.5,1)for2,3,4,and5outcomemarkets,respectively.
Table7.Pricingofsecuritiesbyoptimism,extremeness,andfavorites
Dependentvariable:Returnstoexpiry
Optimism(1=Worstoutcome,1=Best) 0.105 *** 0.106 *** 0.104 *** 0.210 *** 0.043
(0.036) (0.036) (0.036) (0.068) (0.027)
Optimism*Date 0.272 **
(0.121)
Extremeness(1=Leastextreme,1=Mostextreme) 0.052 ** 0.043 * 0.041 0.045 *
(0.023) (0.024) (0.038) (0.025)
Extremeness*Date 0.005
(0.073)
Favorite(Price1/N) 0.211 ** 0.368 ** 0.103 *
(0.084) (0.181) (0.060)
Favorite*Date 0.365
(0.330)
Constant(capturesShortAversion) 0.015 *** 0.013 *** 0.032 *** 0.022 ** 0.024 0.014
(0.003) (0.004) (0.009) (0.010) (0.019) (0.008)
Date(scaled0to1) 0.002
(0.030)
Trades 70,706 37,910 37,910 37,910 37,910 37,910
Weightingoftrades Equal Equal Equal Equal Equal Volume
Uniquemarkets 270 157 157 157 157 157
Notes:Theseregressionspredictreturnsfromagiventrade'spricetoexpiry.Optimismisscaled1(worstoutcomeforGoogle)to1(bestoutcomeforGoogle).
Extremenessisthedemeanedabsolutevalueofoptimism,scaled1to1.Thedatevariableisscaledtobezeroatthebeginningofthesample(4/1/2005)andoneat
theend(9/30/2007).Standarderrorsareheteroskedasticityrobustandaccountforclusteringofoutcomeswithinthesamemarket.
Table8.Returns,optimism,andGooglestockreturns
Dependentvariable:Returnstoexpiry
Optimism(1=Worstoutcome,1=Best) 0.105 *** 0.104 *** 0.096 *** 0.097 *** 0.133 *** 0.129 *** 0.068 **
(0.036) (0.036) (0.034) (0.027) (0.037) (0.036) (0.034)
Extremeness(1=Leastextreme,1=Mostextreme) 0.043 * 0.042 * 0.041 0.041 0.042 0.047 *
(0.024) (0.024) (0.027) (0.027) (0.027) (0.025)
Favorite(Price1/N) 0.211 ** 0.222 *** 0.222 *** 0.225 *** 0.225 *** 0.103 *
(0.084) (0.081) (0.066) (0.065) (0.065) (0.059)
Constant 0.013 *** 0.022 ** 0.022 ** 0.022 0.021 0.045 0.006
(0.004) (0.010) (0.010) (0.023) (0.036) (0.035) (0.028)
Optimism*Googlelogstockreturn(t+1) 0.831 0.906 * 1.033 * 1.173 ** 0.863 *
(0.651) (0.538) (0.554) (0.584) (0.510)
Optimism*Googlelogstockreturn(t) 1.417 ** 1.430 *** 1.302 *** 1.132 ** 0.956 *
(0.687) (0.486) (0.469) (0.513) (0.547)
Optimism*Googlelogstockreturn(t1) 2.209 *** 2.156 *** 2.065 *** 1.512 ** 0.722
(0.791) (0.623) (0.576) (0.658) (0.562)
Optimism*Googlelogstockreturn(t2) 0.034 0.081 0.260 0.017 0.491
(0.676) (0.543) (0.531) (0.626) (0.332)
Googlestockreturns(t+1,t,t1,t2) X X X X X
InteractionsofGooglestockreturns(t+1,t,t1,t2)with
extremenessandfavorites X X X X
Dayofweekfixedeffectsandinteractionswithoptimism X X X
S&PandNasdaqreturns(t+1,t,t1,t2)andinteractions
X X
withoptimism
Uniquemarkets 157 157 157 157 157 157 157
Uniquesecurities 612 612 612 612 612 612 612
Obs 37,910 37,910 37,910 37,910 37,910 37,910 37,910
Weightingoftrades Equal Equal Equal Equal Equal Equal Volume
Notes:Currentdaystockreturnreferstothestock/indexreturnforthesamestockmarketclosetocloseperiod.ThedailystandarddeviationofGoogle'slogstockreturn
duringthesampleperiodis2.0%.Standarderrorsareheteroskedasticityrobustandadjustforclusteringofoutcomeswithinmarkets.
Table9.Regressionspredictingtradecharacteristicsfromtraders'attributes
Dependentvariable:Securitycharacteristic*(1ifbuy,1ifsell)
Note:Eachobservationisasideofatrade.Regressionsusetraderchatacteristicstopredictsecuritycharacteristics,multipledby1ifthesideinquestionis
asell.Regressionsincludetradefixedeffectsandadummyvariableforoneparticularextremelyprolifictrader.Standarderrorsareheteroskedasticity
robustandadjustforclusteringofoutcomeswithinperson.
Table10.Geographyandtradingcorrelations
Dependentvariable:netsharespurchased(normalized)
Independentvariables:Proximityweightednormalizedsumsofcolleagues'pretradepositions
Notes:Independentvariablesarethesumofthepretradepositionofatrader'scolleagues,weightedbythevariablegiven(e.g.,anindicatorforwhetherthetwo
tradersareinthesamecity).Standarderrorsareheteroskedasticityrobustandadjustforclusteringofoutcomeswithinperson.
Table11.Socialandworkrelationshipsandcorrelatedtrading
Dependentvariable:netsharespurchased(normalized)
Independentvariables:Proximityweightednormalizedsumsofcolleagues'pretradepositions
Notes:Thelastcolumnincludes8variablescapturingthepretradepositionsofcolleagueswhoaresimilaralongademographicdimension(attendedthesame
undergraduateschool,hadthesameundergradmajor,arebothorneitherinprogrammingrolesatGoogle,arebothnativeEnglishspeakers,shareacommonnon
Englishnativelanguage,oraresimilaraccordingtothreecommonlystudieddemographicvariables).
Table12.Robustnessoftherelationshipwithgeography
Dependentvariable:netsharespurchased(normalized)
Independentvariables:Proximityweightednormalizedsumsofcolleagues'pretradepositions
Notes:ThecontrolsaddedinsuccessivecolumnsaretheproximityweightedpretradecolleaguepositionvariablesfromTable11.
Table13.Timingofgeographicalproximityeffects
Dependentvariable:netsharespurchased(normalized)
Independentvariables:Proximityweightednormalizedsumsofcolleagues'pretradepositions
Notes:Allregressionsalsoincludecontrolsforthesumofpretradepositionswheneitherbuildingorroominformationismissingforeitherparty.Cols46
includeallofthesocial,organizational,anddemographicvariablesinTable11.
Table14.Proximityandcorrelatedtrading,bysubjectofmarket
Dependentvariable:netsharespurchased(normalized)
Independentvariables:Proximityweightednormalizedsumsofcolleagues'pretradepositions
Column1isidenticaltoTable12,column6andTable13,column4.Columns25restrictthesampletomarketsdealingwithaparticulartypeoftopic.
Table15.Robustnesstoalternativemethodologies
Dependentvariable:netsharespurchased(normalized)
Independentvariables:Proximityweightednormalizedsumsofcolleagues'pretradepositions
Column1isidenticaltoTable12,column6,Table13,column4,andTable14,column1.Incolumns25themethodlogyisalteredasspecified.