Chapter 28: Exercises

Fundamentals (Exercises 1-10)

Exercise 1: SMART Framework Application

Difficulty: Basic

Evaluate the following market question against each SMART criterion (Specific, Measurable, Assessable, Relevant, Time-bound). For each criterion, state whether it passes or fails and explain why.

"Will cryptocurrency become mainstream?"

Then rewrite the question so it passes all five criteria.

Exercise 2: Identifying Wording Pitfalls

Difficulty: Basic

For each of the following market questions, identify the primary wording pitfall (from the categories: ambiguous "or," scope creep, moving goalposts, self-referential, insider-triggerable, semantic gaming, temporal ambiguity, or negation):

a) "Will Apple or Samsung release a foldable phone in 2026?" b) "Will this market close above 60%?" c) "Will AI not cause any job losses in 2026?" d) "Will the CEO of Acme Corp announce a new product this quarter?" e) "Will the economy improve by summer?"

Exercise 3: Resolution Source Selection

Difficulty: Basic

For each of the following market topics, identify the most appropriate Tier 1 or Tier 2 resolution source and explain why:

a) US monthly unemployment rate b) Winner of the 2028 French presidential election c) Global average temperature anomaly for 2026 d) Box office revenue for an upcoming film e) Whether a specific scientific paper is retracted

Exercise 4: Binary vs. Multi-Outcome

Difficulty: Basic

For each scenario, state whether a binary market, multi-outcome market, or scalar/bracket market is most appropriate and justify your choice:

a) Predicting which country will host the 2036 Olympics b) Predicting whether US GDP growth exceeds 3% c) Predicting the closing price of gold on December 31, 2026 d) Predicting whether a specific bill passes Congress e) Predicting which streaming service will have the most subscribers in 2027

Exercise 5: Edge Case Identification

Difficulty: Basic

The following market is proposed:

"Will Tesla deliver more than 2 million vehicles in 2026?" Resolution: Based on Tesla's official delivery report.

List at least five edge cases that should be addressed in the resolution criteria.

Exercise 6: Bracket Design

Difficulty: Basic

Design a bracket market (with 6-8 brackets) for the following question: "What will the US unemployment rate be in December 2026?"

The current unemployment rate is approximately 4.1%. Your brackets should: - Be mutually exclusive - Be exhaustive - Have roughly equal prior probability

Justify your bracket boundaries.

Exercise 7: Resolution Criteria Writing

Difficulty: Basic

Write complete resolution criteria for the following market:

"Will a manned mission reach Mars before 2035?"

Your criteria must specify: - What counts as "manned" - What counts as "reach Mars" - The exact resolution source - At least two edge cases and how they would be handled - A backup resolution mechanism

Exercise 8: Market Lifecycle Identification

Difficulty: Basic

A market is created on "Will the Federal Reserve cut rates at its September 2026 meeting?" The market is created on January 15, 2026.

For each date below, identify which lifecycle phase the market is likely in, and describe the key design considerations:

a) January 15, 2026 b) February 1, 2026 c) September 14, 2026 (day before the meeting) d) September 15, 2026 (day of the meeting) e) September 17, 2026 (two days after)

Exercise 9: Incentive Classification

Difficulty: Basic

Classify each of the following incentives as primarily encouraging (a) participation, (b) accuracy, (c) liquidity provision, or (d) content creation. Some may fall into multiple categories.

1. $10 sign-up bonus in trading credits
2. Monthly leaderboard with prizes for best Brier scores
3. Fee rebates for users who maintain open limit orders
4. 50 bonus points for creating a market that attracts 20+ traders
5. Achievement badge for making 100 correct predictions
6. Referral bonus of $5 per referred user
7. Liquidity mining rewards proportional to time-weighted liquidity provided
8. Tournament entry with $1000 prize pool

Exercise 10: Quality Metric Calculation

Difficulty: Basic

A binary market has the following characteristics: - 45 unique traders - Final price before resolution: 0.72 - Actual outcome: YES (1) - Average bid-ask spread: 4.2% - No resolution disputes - Resolution completed in 3 hours

Calculate: a) The Brier score for this market's final prediction b) Whether the spread is typical (compare to a benchmark of 5%) c) A qualitative assessment of this market's overall quality

Intermediate (Exercises 11-22)

Exercise 11: Market Redesign

Difficulty: Intermediate

The following poorly designed market generated significant controversy:

"Will there be a major cyberattack in 2026?"

The market resolved YES after a ransomware attack on a regional hospital chain.

a) Identify all design flaws in this market b) Redesign the market with proper resolution criteria c) Create a suite of 3-4 related but more specific markets that would capture the intent of the original question more effectively

Exercise 12: Subsidy Allocation

Difficulty: Intermediate

You have a budget of $5,000 to subsidize 10 new markets. Using the subsidy value model from Section 28.7.3, allocate the budget across the following markets. Justify your allocation.

Exercise 13: Mutually Exclusive and Exhaustive Validation

Difficulty: Intermediate

A market for "Who will be the next UK Prime Minister?" has the following outcomes: - Keir Starmer (incumbent) - Rishi Sunak - A Labour Party member - A Conservative Party member - Other

a) Are these outcomes mutually exclusive? If not, identify the overlaps. b) Are these outcomes exhaustive? If not, identify what is missing. c) Redesign the outcome set to be properly mutually exclusive and exhaustive.

Exercise 14: Ambiguity Analysis

Difficulty: Intermediate

A market reads: "Will Apple release the iPhone 17 in September 2026?"

List at least six distinct interpretations of this question that could lead to different resolutions. For each interpretation, explain the ambiguity and how to resolve it. Then write a final, unambiguous version.

Exercise 15: Herfindahl Index Calculation

Difficulty: Intermediate

A prediction market has the following trading activity (by volume):

a) Calculate the Herfindahl Index for this market. b) Is this market well-diversified? Compare to a perfectly equal distribution among 8 traders. c) What would happen to the HHI if Trader A's volume doubled while everyone else stayed the same? d) At what point (what share for the largest trader) would you consider the market "dominated"?

Exercise 16: Calibration Analysis

Difficulty: Intermediate

A prediction market platform resolves 100 binary markets. Here are the results grouped by final market price:

a) Calculate the actual resolution rate for each price range. b) Plot (or describe) the calibration curve. c) Is this platform well-calibrated? Identify any systematic biases. d) Calculate the overall Brier score using the midpoint of each price range as the prediction.

Exercise 17: Resolution Rules Engine Design

Difficulty: Intermediate

Design a resolution rules engine (pseudocode or Python) for the following market:

"Will a Category 5 hurricane make landfall in the continental United States in the 2026 Atlantic hurricane season?"

Your engine should: - Define primary and backup resolution sources - Handle the case where a hurricane is initially classified as Category 5 but later downgraded - Handle the case where the hurricane season is extended - Implement a timeout mechanism - Return one of: YES, NO, or N/A

Exercise 18: Subsidy Decay Optimization

Difficulty: Intermediate

A market is seeded with $1,000 initial subsidy. The platform uses exponential decay: $s(t) = s_0 \cdot e^{-\lambda t}$ where $t$ is in days.

a) If the platform wants the subsidy to decline to $100 after 30 days, what value of $\lambda$ should they use? b) Calculate the total subsidy spent over 90 days (integrate the decay function). c) Compare to a linear decay that reaches zero at 90 days. Which spends more in the first 30 days? d) Propose a hybrid decay function that provides strong initial subsidy but a longer tail than pure exponential.

Exercise 19: Multi-Outcome Market Design

Difficulty: Intermediate

Design a complete multi-outcome market for: "Which company will have the highest market capitalization on December 31, 2026?"

Include: - Complete list of outcomes (how many? which companies?) - Resolution criteria and source - How to handle ties - How to handle mergers, acquisitions, or delistings - How to handle currency conversion (for non-US companies) - Justification for your outcome space choices

Exercise 20: Market Quality Dashboard Design

Difficulty: Intermediate

Design a market quality dashboard that a platform operator would use to monitor market health. For each metric: - Define the metric precisely - Specify the data source - Set threshold values for "healthy," "warning," and "critical" - Describe what action to take at each level

Include at least 8 metrics spanning participation, liquidity, accuracy, and resolution quality.

Exercise 21: Template Market Generation

Difficulty: Intermediate

Create a template system for generating economic indicator markets. Your template should: - Accept parameters for: indicator name, source agency, frequency, threshold, period - Generate a complete market question - Generate complete resolution criteria - Handle common edge cases automatically

Demonstrate your template by generating 5 different markets from it.

Exercise 22: Insider Trading Analysis

Difficulty: Intermediate

Consider the following markets. For each, assess the insider trading risk on a scale of 1-5 and explain your reasoning:

a) "Will Company X announce layoffs before Q3 2026?" b) "Will the US unemployment rate exceed 5% in 2026?" c) "Will the FDA approve Drug Y before 2027?" d) "Will the Bitcoin price exceed $150,000 before July 2026?" e) "Will University Z's football team win the national championship?" f) "Will the next iPhone have a feature called [specific feature name]?"

For markets with high insider risk (4-5), propose design modifications that would reduce the risk.

Advanced (Exercises 23-30)

Exercise 23: Formal Outcome Space Verification

Difficulty: Advanced

Write a formal proof that the following outcome space is both mutually exclusive and exhaustive for a market on US GDP growth (annualized, real):

$O_1 = (-\infty, -2\%)$ $O_2 = [-2\%, 0\%)$ $O_3 = [0\%, 2\%)$ $O_4 = [2\%, 4\%)$ $O_5 = [4\%, +\infty)$

Then show that the following modified outcome space is NOT mutually exclusive and identify the problem:

$O_1' = (-\infty, -2\%]$ $O_2' = [-2\%, 0\%]$ $O_3' = [0\%, 2\%)$ $O_4' = [2\%, 4\%)$ $O_5' = [4\%, +\infty)$

Exercise 24: Game-Theoretic Analysis of Resolution Manipulation

Difficulty: Advanced

Consider a market where the resolution depends on a single data point that could be manipulated by a sufficiently motivated actor (e.g., a company's self-reported revenue).

a) Model this as a game between a trader who can influence the resolution and ordinary traders who cannot. b) Under what conditions is manipulation profitable for the insider? c) How does the market's liquidity affect the incentive to manipulate? d) Propose mechanism design solutions that reduce the incentive for manipulation.

Exercise 25: Optimal Bracket Design

Difficulty: Advanced

Given a prior distribution $P$ over a continuous outcome (e.g., unemployment rate ~ Normal(4.0, 0.5)), design an optimal bracket market that maximizes the information gained from observing the market prices.

a) Show that equal-probability brackets maximize the Shannon entropy of the prior across brackets. b) Calculate the optimal bracket boundaries for 6 brackets given the Normal(4.0, 0.5) prior. c) Compare the information content (in bits) of your optimal brackets vs. equal-width brackets from 2% to 6%. d) How should brackets be adjusted if the goal is to maximize sensitivity around a policy-relevant threshold (e.g., 4.5%)?

Exercise 26: Automated Market Creation Pipeline

Difficulty: Advanced

Design and implement (in Python) an automated market creation pipeline that:

1. Takes a news headline as input
2. Extracts key entities and events using simple NLP (you may use regex or string matching rather than full NLP)
3. Generates 3 candidate market questions
4. Scores each question on the SMART criteria (automated heuristics)
5. Selects the best question
6. Generates resolution criteria from a template database

Test your pipeline on 5 different news headlines and evaluate the quality of the output.

Exercise 27: Cross-Market Arbitrage Detection

Difficulty: Advanced

Two prediction market platforms have the following related markets:

Platform A: "Will Democrats win the 2028 presidential election?" Price: 0.52 Platform B: "Who will win the 2028 presidential election?" Prices: Democrat 0.48, Republican 0.45, Other 0.07

a) Is there an arbitrage opportunity? If so, describe the trades. b) Why might legitimate price differences exist between platforms? c) How do differences in resolution criteria contribute to price differences? d) Design a reconciliation framework that would help identify whether price differences are due to design differences vs. information differences.

Exercise 28: Market Design for Sensitive Topics

Difficulty: Advanced

Some prediction market topics are ethically sensitive (pandemic death tolls, assassinations, terrorist attacks). Design a comprehensive policy for handling sensitive markets that:

a) Defines criteria for what makes a market "sensitive" b) Specifies additional design requirements for sensitive markets (e.g., no markets that create perverse incentives) c) Addresses the moral hazard problem (does a market on terrorist attacks incentivize terrorism?) d) Proposes mechanisms that capture the informational value of sensitive predictions without creating harmful incentives e) Provides specific examples of markets that should be allowed, modified, and prohibited

Exercise 29: Dynamic Market Design

Difficulty: Advanced

Traditional prediction markets have fixed questions and resolution criteria. Design a "dynamic market" system where:

a) The question can be refined over time as more information becomes available b) Resolution criteria can be updated without invalidating existing positions c) New outcomes can be added to multi-outcome markets d) Market splits (one market becomes two more specific markets) are possible

For each feature, analyze: - How positions would be converted - Whether existing traders would be disadvantaged - What incentive problems might arise - How trust would be maintained

Exercise 30: Comprehensive Market Suite Design

Difficulty: Advanced

You are the chief market designer for a new prediction market platform. Design a comprehensive market suite for the 2028 US Presidential Election. Your suite should include:

a) At least 15 distinct markets covering different aspects of the election b) A mix of binary, multi-outcome, and scalar/bracket markets c) Conditional markets (e.g., "If X wins the nomination, will they win the general?") d) Complete resolution criteria for each market e) A liquidity allocation plan given a $50,000 total subsidy budget f) A timeline showing when each market should be created and closed g) Quality metrics you would track for each market h) Contingency plans for edge cases (candidate drops out, contested election, etc.)