Dec. 19, 2008
IEM offers lessons in box office prediction markets
A division of the bond trading firm Cantor Fitzgerald has announced a plan to start a real-money movie box office futures exchange.
The University of Iowa's Iowa Electronic Markets has been operating a similar real-money box office market since 1995, and its coordinator thinks traders on Cantor's proposed market will have their work cut out in finding a way to make money.
"Forecasting movies is a very difficult problem," said Tom Gruca, a professor of marketing in the Tippie College of Business who studies the use of prediction markets as a forecast tool. "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."
Cantor Fitzgerald subsidiary Cantor Entertainment recently filed for regulatory approval with the Commodities Futures Trading Commission (CFTC) to start a futures market called the Cantor Exchange. If approved, traders will be able to buy and sell contracts based on the box office gross for a movie's first four weeks.
The IEM's movie market operates primarily as a classroom market for one of Gruca's fall semester graduate level marketing courses, so traders are made up of students and other academic traders interested in learning about prediction markets. Traders buy and sell real money contracts based on their prediction of the opening four-week box office of a film Gruca selects.
The first market opened in 1995, shortly before the opening of another box office futures market, the Hollywood Stock Exchange, a for-fun only market that's also operated by Cantor Fitzgerald.
Since then, Gruca said the two markets have shown how difficult it is to accurately forecast box office returns. The IEM's average percentage error is 38 percent, while the Hollywood Box Office predictions for the same movies miss by an average of 31 percent.
Compare this to the IEM's presidential vote share market, which has an average error of about 1.8 percent, and the difficulty of forecasting movie box office results is obvious.
Like all IEM markets, traders on the movie market are limited to an investment of $500. Cantor's proposed market will have no limit, but Gruca said the track records of the IEM and Hollywood Stock Exchange show that cash doesn't make much difference in a movie market's predictive ability.
"The real money IEM markets do not improve on the forecasts from the Hollywood Stock Exchange, so financial incentives don't play a big role in obtaining more accurate predictions," Gruca said. "Neither of the movie markets does as good a job forecasting as the political prediction markets."
The IEM's first movie market, in 1995, sold contracts for "Nick of Time" and "Money Train," two movies that have been largely lost to the mists of time. Other movies the IEM has traded include "Enemy of the State," "Sleepy Hollow," "The Matrix," "Monster's Inc.," "Harry Potter and the Sorcerer's Stone," and "Happy Feet."
This year, the IEM sold contracts on "Twilight," which Gruca has not seen because "I'm not a teenage girl, the main target market for this film." The performance of both the IEM and Hollywood Stock Exchange in predicting the box office, though, is predictably off.
On the eve of the movie's Nov. 21 opening, the IEM market predicted that the most likely four-week gross -- a 35 percent likelihood -- was $90 million. However, the movie's gross in its first weekend alone was $70.6 million. The market predicted only a 12.5 percent likelihood of the correct gross, above $130 million. At the same time, the Hollywood Stock Exchange traders over-estimated the movie's performance with an expected four weekend gross of more than $170 million.
STORY SOURCE: University of Iowa News Service, 300 Plaza Centre One, Iowa City, Iowa 52242-2500
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