Prediction Markets vs. Decision Markets

Chris F. Masse January 25th, 2007

James Surowiecki (who has just posted an interesting comment on Midas Oracle, at the bottom of the Ken Kittlitz interview) pointed to his 2003 New Yorker piece:

Why do decision markets work so well? They are extremely efficient at aggregating information and tapping into the collective wisdom of a group of traders, and groups are almost always smarter than the smartest people in them. As in financial markets, the incentive to get the better of others (whether the reward is profit or mere satisfaction) causes traders to seek out good information. The absence of hierarchy—markets don’t have vice-presidents—insures that no single person has too much influence and that diverse viewpoints don’t get shut out.

Decision markets also skirt the political and personal issues that so often clog the flow of information within organizations. Because people are rewarded only for being right, they have no incentive to hide information, pursue agendas, or go along with the crowd. Of course, an organization can’t rely on such prophecies unless it is run by leaders who don’t claim to have a monopoly on wisdom. Leaders like that are hard to come by, which may be why decision markets have been ignored, for the most part, by corporations and governments.

It’s a very good explainer of the prediction markets. One remark, though —if I may.

I use the term “decision markets” only to describe Robin Hanson’s concept (PDF), namely a market-generated automatism that would replace the human decision making. For the rest, I use the common term, “prediction markets”.