Prediction: Predictive markets will be a next big thing

Prediction: Predictive markets will be a next big thing

Summary: Prediction markets may be the next big thing. Maybe.

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TOPICS: Hewlett-Packard
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Prediction markets may be the next big thing. Maybe. At an evening “confab” at Yahoo a number of experts in the prediction market field talked about the value to corporations of tapping into collective intelligence . The author of  popular book, The Wisdom of the Crowds, James Surowiecki moderated the mini-conference.

Surowiecki started (at left) off by outlining the challenges of bringing collective intelligence/wisdom of crowd into corporate environments. He is clearly an advocate for prediction markets, extracting wisdom from crowd behavior.

“The success of prediction markets will show that real knowledge is within the organization as a whole and employees have a lot to say about what the future looks like,” Surowiecki said.

Prediction markets are not like public opinion polls, in which people vote for who they want to win. The mechanisms for prediction markets are more like the stock market, with knowledgeable people betting on the most likely outcome of an event. Several prediction markets currently exist, such as blic examples include TradeSports, Iowa Electronic Markets, Hollywood Stock ExchangeHedgeStreet, Yahoo Tech Buzz Game, NewsFutures and Inkling Markets

Prediction markets have proven to be more accurate than other mechanisms for predicting outcomes. Eric Zitzewitz, an assistant economics professor at Stanford, showed how predictions did a better job that traditional methods in predicting the effects of election outcomes on the economy,  showing that control of Congress has 10 to 30 percent as much influence on economic policy as the presidency. Prediction markets could be applied to studying the effect of public policy decisions on stocks, the effects of corporate policies, mergers & acquisitions and market views of Zitzewitz said.

However, it's difficult for organizational structures based on command and control to give up power and embrace the wisdom of employees, Surowiecki said. “Predictive markets run counter to the way almost intuitively think knowledge should be structured and predictions made,” he said. “They make it significantly easier to access the knowledge of the people in the organization, but companies don’t know how to get at it.”

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In addition, the Net generation entering the workforce, brought up on steady diet of instant messaging and social media, won’t adapt easily to a corporate culture that is too hierarchical and doesn’t allow for diverse voices to be heard.

Prediction markets are starting to gain some traction in corporate settings, despite some early bad publicity. Robin Hanson (at left), one of the leading lights of prediction markets and an economics professor at George Mason University, participated in creating the Policy Analysis Market, a DARPA-funded research project in which people could speculate on questions related to the Middle East policy, such terrorist attacks. The market was unceremoniously killed in July 2003 after two senators called for an immediate halt to the “tax-funded ‘Terror Market’ scheme.”

Most important in any prediction market is coming up with unambiguous questions, the experts said, such as the consequence of raising pricing by 10 percent, acquiring a firm, firing a CEO (clearly with anonymity applied), predicting component pricing or getting a project done on time by dropping a feature.  "The value in prediction markets is if you ask the most important questions, no matter who it bugs, to get the highest value. What would happen if ran a form of government with these kinds of markets?," Hanson asked.

Hewlett-Packard has internally used predictions markets to predict DRAM pricing and is rolling a  project out with a marquee customer next month, according to Leslie Fine of  HP Labs. Her group's research has focused on the "wisdom of the conference room or water cooler," take bias, manipulation and hierarchy out of predictions within small groups. Instead of whoever yells the loudest, the wisdom of the small crowd rules.

Saddled with the name BRAIN--Behaviorally Robust Aggregation of Information Networks--HP has applied its technology to predicting memory pricing. She described it as a "betting game with a behavioral twist." For predicting memory pricing, instead of a series of contentious meetings, the group, which included contract negotiators and others with credentials to contribute individual wisdom, had a few hours training in using the prediction market mechanism and were asked to make six predictions--one, three and six month pricing for two kinds of memory. The end result was less time spent and more accurate predictions.

"Proper scoring rules incent truthful revelations, but we all have different preferences for risk. We needed way to amplify or temper the strength of an opinion. We designed a mechanism to contrast individual coefficients for each player, to summarize the risk attitude for each player beforehand," Fine said. The bets are aggregated and weighted on the risk profiles. It takes about 15 minutes for a small group, with some expertise or knowledge relevant to the question, to collectively answer a questions, such as if a bluetooth adapter is included in product X, what will the market share be.

In a one year trial with 14 finance executives in the HP Services group, the BRAIN treatment predicting operating profits outperformed the traditional method in every quarter. In January, HP is launching a prediction market for drug giant Pfizer after a year trial. 

I posted earlier about Yahoo creating the Yootle, a virtual currency, and figuring out ways to bring prediction markets and other social group decision mechanisms to the masses. Microsoft and Google are internally using prediction markets as part of its software development project management, asking questions such as when a product feature will be done, which can help in more accurately allocating resources.  Bo Cowgill of Google (at left) is a fan of using socially- and reputation-based rewards, rather than monetary prize (which are limited in the current regulatory environment), to give people incentives to participate. That seems to work in a culture like Google's, where employees like to compete with each other for cred. "If it's not intrinsically fun, you’ll have to pay them," Hanson said.

The presenters noted some concerns, including legal and moral issues, as well as the more pedestrian self-defeating prophecies, decision selection biases, too many bozos in the collective pool, timeframe factors, and poorly asked questions, such as "Will my wife get pregnant next month?" (the most clueless question Adam Siegel of Inkling Markets has seen so far). 

Prediction markets and other group decision-making mechanisms that capture collective intelligence, the wisdom of the crowds have the ingredients to be a the next big thing, a tool that becomes part of mainstream corporate and digital life. It seems to work better than endless meetings, emails and spreadsheets. It's inherently social and perhaps viral, a kind of game that can have serious impact and consequences. But it's not business as usual. The cultural change more than any technological impediment will hold it back in corporations, but like the flurry of Web 2.0 technologies seeping in the back door, I'll predict that prediction markets will become a next big thing.

 


Topic: Hewlett-Packard

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  • net generation facing corporatism

    In Europe, the problem is even more difficult : replace "corporate" with "state" and it will become evident...
    hgeorgescu9
    • States & corporates also face net generation

      As has already been noted, collective wisdom already exists. Predictive markets will give the wisdom a voice, and the medium will "persuade" both corporates and state mechanisms to listen, and eventually act.

      Democratic parties need to attract popular vote, so they need to listen to the collective electorate. The UK government is already the most media sensitive ever. Media knows the pressure they can bring to bear on politicians, otherwise there would be no political resignations. Latest example here a certain D Rumsfeld. Expect ministers to be embarrassed more often. And a good thing too, quite often ! GW take note !

      In one party states, the predictive market offers a means of expressing opinion through virtual identity, so it will be highly popular as a means of free expression. As opinions gain currency, one party states will have to take measures to counter opposing views. Its much harder to intimidate a virtual citizen than a physical one, and collective environments also spread individual risk ! So state measures will need to be more positive, and we can hope fervently this happens sooner rather than later.

      As to corporates, it will remind many of them that the customer is king. Ignore the customer, and they will vote with their feet and go to those companies that both listen and act.

      Bring on predictive markets ! I for one will be actively supporting them.

      Kind Regards,

      Peter Jones,
      Business Innovation & Strategy Ltd (UK)
      http://www.ecademy.com/module.php?mod=guestbook&id=35196
      peter.m.c.jones9
  • Predictive intelligence

    Predictive markets is an insightful column and likely to be the next major enhancement to decision making in a wide variety of applications. I don't believe the field is limited to collective wisdon, however. As valuable as that can be, we all know the limits of crowd mentality - it typically supports incumbent ideas and ignores the next new thing. Examples abound in various industries.
    A more rational and empirical approach involves the application of pattern recognition, rules and statistical techniques to quantify the probable impact of event sequences to predict probabilities of certain outcomes. A new field of predictive modeling is emerging that applies rigorous quantitative methods to assign probabilities and focus attention on both obvious and hidden risks. Combining this approach with collective wisdom is likely to yield better insights and more actionable information.
    JimF2
  • PM Consortium -- http://www.pmcluster.com/

    Hi --

    Nice coverage of the event.

    Collective wisdom is already a big thing.

    A market is a simply social arrangement that allows people to discover information and carry out a voluntary exchange of goods, services or information. An information or prediction market is exactly the same. They are popular and pervasisve.

    The industry-wide consortium for research, tools, practices and regulation is: http://www.pmcluster.com/

    -j
    jheuristic
  • RE: Prediction: Predictive markets will be a next big thing

    It may be the next big thing in science, but it probably would require more time to be the next big thing in the society. Though Yahoo Buzz Game or HSX are very popular, I doubt that a child, student or a housewife even know what PM are. Scientists create PM, but collective intellect, society - that is what is all about when we talk about PM. So I think this business requires more promotion.
    ekhadjin