#69 Meaning of Endowment for MarketMaker

[Anonymous]

I don't understand the meaning of the endowment for the MarketMaker. What exactly is being influenced by this endowment? Can you point out the meaning of the endowment?

Sometimes I get errors like the once attached when doing orders in my test prediction market. Does this have to do with a too low endowment?

Kind regards,
Cornelius

[Anonymous]

Screenshot Problem 1

[Anonymous]

I forgot to say: I plan to run an experiment with about 100 participants. Which endowment for the MarketMaker do you recommend, if every player starts with 1000$.

[Chris Hibbert]

The endowment is defined as an amount of money that has been given to the market maker from which it can subsidize bets. Robin Hanson's design of the logarithmic market maker was intended to allow a funder to set up a market, and ensure liquidity across the entire range of possible prices. The Market maker's behavior allows it to guarantee to the funder that it would never spend more than its initial endowment, while always being able to enable trades, no matter the price history.

In Zocalo, this is modelled by making the currency be a conserved quantity, outside the control of the trading engine. The market maker can't create money, and can only get new coupons to sell by providing money to the CouponBank.

The consequence of the size of the endowment is that it impacts Beta, which controls how quickly the price changes in response to purchases or sales in the market place. I can explain more about Beta, or point to other explanations, if this isn't clear enough. I'd recommend reading Robin Hanson's papers on Combinatorial Markets and the Logarithmic Scoring Rule.

The size of the endowment shouldn't cause that error.

I don't see what would produce that error. Can you tell me what version of Zocalo you're running, and how the markets were set up?

[Chris Hibbert]

Okay, I've looked a little deeper, and I see that you're running a multi-outcome market. How many outcomes have you specified?

The error arises when the market maker is trying to calculate the prices at which trades took place so it can report the trade (via AJAX) and the Average price for some outcome turns out to be more than $1. I'm not sure how that could happen, and the code clearly expects that the average price will be a price in the range from zero to one. I can probably replicate the trading that led to this if you'll send me a copy of the log file, and tell me how the market was set up.

For your other question, I don't have strong results to point to telling what endowments will work best. My SWAG would be that the range of $1000-$10,000 should be reasonable. The way to tell whether you want to increase or decrease the number is if player's trades either often move the price too quickly to an end-point of the trading range (which would indicate that you should increase the endowment), or that traders can spend their entire balance, and not move the price significantly.

With 100 traders, each with $1000, you probably want trades of $100-200 (starting from equal odds) to move the price by a few percentage points. If you plan to have many active markets that traders will spread their balance among, you'd reduce the endowment, since each player would be spending less in each market.

[Anonymous]

Thank you very much for your help!!!

The error only seems to occur when the price of a single share is pushed near 100 cent, which won't happen in an experiment.
It happened cause I exhausted the system on purpose.
So, as this is the case, it's no real problem for me.

The newest Zocalo version (2011.2) is used.
The market consist of 6 possible results and was endowed with 1000$.