The idea of a prediction market is relatively new, although markets themselves are nothing new. All markets are predictive to some extent, as they can be seen as an aggregation of dispersed information, and usually the information is signaled through prices and or price changes. Predictive markets apply the market mechanism to specific questions in the hope of applying the collective intelligence of groups to make better decisions.
“The premise is that under the right circumstances, the collective judgment of a large group of people will generally provide a better picture of what the future might look like than anything one expert or even a small group of experts will come up with.”
“In most organizations, there’s a lot of knowledge that the people who are making the decisions don’t have access to. They may not know that it’s out there or they don’t know whom to ask. Even if they do, the respondents might not want to disclose this knowledge, because they’re worried about what the boss would say.”
“But for a crowd to be smart, it needs to satisfy certain criteria. It needs to be diverse, so that people are bringing different pieces of information to the table. It needs to be decentralized, so that no one at the top is dictating the crowd’s answer. It needs to summarize people’s opinions into one collective verdict. And the people in the crowd need to be independent, so that they pay attention mostly to their own information and don’t worry about what everyone around them thinks.”
The crowd can also be your own. As in the case of corporations who are using prediction markets comprised solely of their own employees, and who are hence using internal predictive markets as a business intelligence tool.
“Google appears to be into prediction markets in a relatively big way... We launched our prediction markets in April 2005, and since then we’ve asked about 275 different questions, and there’ve been some 80,000 trades.
“Almost all Google products have had, or still have, a prediction market about their usage.”
This is a fascinating insight into how Google leverages its human resources to assist organizational decision-making. By systematically encouraging and nurturing the use of such markets within its organization, Google is reaping an additional “information dividend” from its human capital base, and at the same time learning important information about how its organization functions.
“Besides getting good answers to the questions we ask, we really try to use these markets to understand how our organization works. For example, we have been exploring the cognitive biases in different parts of the company and the way information moves inside it through different types of networks.”
Some of the insights that Google has gathered are indeed quite useful.
“Do crowds learn over time? ... Our experiences suggest that they do. The longer you work at Google and the longer you trade in the prediction markets, the more calibrated you become and the likelier you are to have a successful trading record… The market as a whole also got smarter. The trades we observed two and a half years after launch were better calibrated than the ones in the beginning, and we could observe a steady improvement over time.”
“One important caveat is that being higher in the company, measured by distance from the CEO, actually seemed to place you at a disadvantage for trading profitably.”
Wow! This observation certainly flies in the face of accepted corporate organizational wisdom. Prediction markets are certainly a trend to keep an eye on.
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