As I mentioned last month, one reason for my dearth of posts was that I was busy teaching a class on computational complexity. I was also rushing to submit a paper to a workshop (but then the deadline got extended), and to submit a finalized version of this paper. Despite my absence from the Providence blogging community, however, I’ve remained fully entrenched in the blogging lifestyle.

First off, despite my dire predictions, Passive-Aggressive Notes did end up winning a Webby. It turns out that there was both a “People’s Voice Winner”, and a “Webby Award Winner”, which I assume was awarded by a select panel of internet experts (along with David Bowie). It’s no surprise that Passive-Aggressive Notes is the clear preference among educated elite, where as the web surfing masses mostly enjoy crudely captioned pictures of confused cats. (Speaking of which, I saw faildogs.com for the first time yesterday, frickin’ awesome!)

Now I know what you’re thinking, with Passive-Aggressive Notes already having won both a Webby and the SXSWi Best Blog Award, how am I going to continue to fill this blog with posts devoted to the winning of web awards (or “award winning posts” as I like to call them). That was my primary concern as well, which is why I shrewdly decide to support a second found-content blog. Last Thursday was the official debut of the EERac-supported version of Postcards From Yo Momma.

Postcards From Yo Momma is a collection of motherly emails and instant messages. The site’s creators were previously hosting it on tumblr, which is a bit sparse for my taste (particularly for a site that’s already landed a book deal). Since we were able to get the new version of the site up in time for Mother’s Day (Hi Mom!), its launch happened to coincide with it being featured on newsweek.com and npr.

Now that the madness of getting the site up in time has subsided, I’d love to hear suggestions for making the site better. In fact, several of my friends were already kind enough to explain to me why my initial design totally sucked. A few of the sites few commenters have also echoed their concerns, but the internet does tend to lend itself to that sort of thing. At the very least, I’m confident that if we switched back to the old, ultra-minimal design, there’d be a lot more complaints (except no one would hear them because the old site didn’t even allow for comments).

So there you have it, a new award and a new site. Plus two weeks ago I went to a book-release party for prominent political blogger (also my childhood friend), Matthew Yglesias. Viva la blogosphere!

According to Dave (and his team of experts) the last 70 years may soon be viewed as an abnormality in the world of political prediction. Today we rely heavily on polling data, but back before 1930, betting on wall street was all the rage. During the 1916 election of Woodrow Wilson over $160 million (in today’s dollars) was wagered in Wall Street’s outdoor curb exchange (this later became the American Stock Exchange).

With money at stake, newspapers could predict elections simply by reporting how the masses were betting. This same idea is gaining prominence today. Dublin-based InTrade, for example, hosted close to $25 million dollars in bets for the US 2004 election (their founder, who also started TradeSports, recently engaged in q & a over at freakonomics.com).

InTrade (and TradeSports) is just one an example of a prediction market, a financial exchange in which the final value a position is tied to the occurrence of some real-world event. Another example is Predictify (also the focus of a recent freakonomics post), a new website where you don’t even need to wager to make money (although it’s too soon to tell if it actually works).

Since Dave didn’t have space, I thought I could supplement his article by briefly explaining how a prediction market works. For example, suppose you want to predict which candidate will win an election, Ms. X or Mr. Y.

A simple approach is to allow individuals to buy a share of the winnings if a particular candidate wins. In this case, you can choose to spend d dollars on Ms. X, and if Ms. X wins, you’ll get a share of the total amount bet on either candidate. If T dollars were bet in total, M of those dollars were bet on Ms. X, you’ll get d*T/M dollars.

The nice thing about this is that before the election, M/T can be interpreted as the probability Ms. X wins. Why is this? Well suppose M and T are both big numbers, and M/T is .15. If the election is about to occur, and you think Ms. X has a 20 percent chance of winning, the amount you expect to gain by betting 1 dollar on Ms. X is .2*[your payoff if Ms. X wins] = .2*T/(M + 1).

We assumed (M/T) = .15, and both M and T are large, so T/(M + 1) is very close to 1/(.15). This means that by betting a dollar on Ms. X, you expect to gain at least .2/.15 > 1 dollars. In other words, you expect to make money by betting on Ms. X. More generally, when M/T is less than Ms. X’s true probability of winning, an informed investor has the opportunity to make money by betting on Ms. X. Similarly if M/T is too large, an informed investor can bet on Mr. Y.

This all sounds great, but there’s a problem. Before the election, M and T change over time. If you notice one week before the election that M/T is way too small, when can invest a dollar in Ms. X, but your final payout is tied to the final values of M and T once the election takes. Unless the election is about to take place, you have no incentive to invest.

To fix this, prediction markets don’t simply act as betting pools, they create shares for a given event, and allow investors to buy the shares at a price depending on M/T. In our election example, a prediction market can initially sell each candidates shares for $0.50. After a while, when M and N dollars have been spent on Ms. X and Mr. Y, respectively, and T = M + N dollars have been spent in total, a Ms. X share is priced at M/T, and a Ms. Y share at N/T. Once the election takes place, if Ms. X wins, a given share of her stock originally bought for d dollars is worth d*T/M, and a share of Mr. Y stock is worthless.

Now let’s check that this works. As before, assume Ms. X has a .2 chance of winning. When the election is about to occur, the expected return on a Ms. Y share is .2*(M/T)*(T/M), so if M/T is less than .2, you should still buy her stock (and similarly if it is greater than .2, you should buy Mr. Y stock). Now observe that, unlike above, you should still buy even if the election is a week away.

If you expect M/T to eventually approach .2, but shares are selling for $0.15, you can still expect to profit. Even if you are wrong and M/T drops further, you’ll make even more money if Ms. X wins. Finally, if M/T starts to increase beyond .2, you can make money by selling your shares for a profit. In conclusion, the market works! Capitalists rejoice!

In the end, there’s actually much more flexibility regarding how a prediction market can operate (and other problems to worry about). If all you want to predict is the outcome of an event, as oppose to each outcome’s probability, money isn’t even required. All investors really need is a good incentive to choose correctly. Back in the days of the curb exchange, non-monetary bets were more than acceptable. Here in Providence the classic “roll a peanut up a steep hill with a wooden toothpick”-wager seems most appropriate.

Thanks to the article (and this photo), I can safely proclaim Kevin, creator of the facebook application Enemybook, my most hateful friend (see how menacing he looks). Kevin’s facebook app allows users to list their enemies right in their facebook profile. It also inform these no-goodnicks precisely why they made the list, and allows you to periodically flip them off. Once the article appeared, Kevin was also interviewed on NPR, plus news of the whole thing appeared on slashdot and wired.com.

The amazing thing about all this press coverage is that Enemybook isn’t popular! Apparently the writer from the Globe saw the app mentioned on Ben Smith’s politico.com blog and decided she wanted to find out more. At that time, Enemybook only had about 1,200 users, but popular facebook applications have hundreds of thousands of users. Thanks to all the press Kevin now has over 5,000 users, but he still has a way to go before his app can make real money off of ads.

If you’re a facebook user, please do us all a favor, install the Enemybook and start picking fights with your friends. I’m sure Kevin’s hero Sun Tzu wouldn’t have it any other way.

At 22 Dave shook up Providence politics with a surprise victory in Ward 1’s 2002 election for city councilman. Since he ran as a Green, he ended up becoming the council’s minority leader (no republicans were elected). Even though he had only moved to Providence in 2001, he won over skeptics by committing to his post full time. The position only pays $18,000, so most city councilman do additional work on the side. For a hip young guy like Dave however, 18k is more than enough, plus he needed plenty of time to wander around Brown University and maintain his activist lifestyle.

Dave has since become a Democrat, as well as a State Representative. Since his current job only pays him for 6 months out of the year, his salary has dropped to $14,000. Perhaps that’s why he’s became a cofounder of the Providence Daily Dose, the other blog with which I’m affiliated. After his plug in The Phoenix, I’m sure the site will explode any day now. Also I think he’s been studying for the LSATs, so maybe there’s some way that could lead to additional income.

For now though, Dave continues his modest (but also amazingly hip) lifestyle based out of his Ives Street apartment, nicknamed “Telescope” (the article failed to mention that bit). Even though Telescope contains “an easy chair that once belonged to New York Times’ journalistic heir Arthur Gregg Sulzberger,” the Pheonix referred the apartment as “unremarkable for a 20-something in Providence”. As a 20-something I respectfully disagree.

Just last spring I remarked (during a potluck in fact) how unusual it was that their kitchen contained only one knife, a cleaver our friend Ian accidently left several months prior. For years I also remarked that they might want to finally get internet (I eventually gave them an old computer to get the ball rolling), or perhaps hook up the stereo sitting in the middle of their living room (our friend Tim eventually took care of that). To be fair, after reading this article about my hometown Senator I no longer think Dave’s lifestyle choice is that uncommon for an elected official.