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Chris F. Masse May 25th, 2007

The American: A Bettor World - Once apprenticed to a bookie, Justin Wolfers of Wharton now draws economic insight from the behavior of gamblers.

[...] Last year, for instance, the aggregate of small bettors who placed wagers on electoral results on TradeSports, a Web-based market, forecasted the outcome of every U.S. Senate race correctly. Companies like Best Buy, the electronics retailer, now maintain in-house markets where employees bet on how products will sell. The results help with pricing and inven­tory decisions. Wolfers says that companies have shifted to pre­diction markets because they work better than the traditional means for gathering data and making forecasts, such as sales meetings. [**] “Think of what a meeting is,” Wolfers says. “It’s some fat, obnoxious guy who talks for three minutes despite the fact that he knows nothing. In the meantime, there’s a woman who sits in the back and says nothing because she may feel her opinion isn’t taken into account. And then there’s the brown-noser, who wants to be senior VP and will say anything the boss wants to hear.” When you set up a prediction market in which employees bet actual cash, you weed out those who don’t know anything. As for the sycophant: if the boss isn’t watching, he’s more likely to bet what he really thinks. With a prediction market, everyone brings a small piece of information to the table, and the consensus [**] proves surprisingly accurate. [...]

[...] Zitzewitz says it was Wolfers’s idea to use an online prediction market to assess the economic impact of the war in Iraq, before the U.S. invaded. Up to that point, academics had only used predic­tion markets for retrospective insight into historical events. But in the Iraq study, which Zitzewitz and Wolfers wrote with Australian economist Andrew Leigh, the authors used markets to evaluate the cost of a policy before it was instituted—an approach that suggests such markets could be used to guide policy. They noted that prices of oil on futures mar­kets implied a belief that an oil price spike caused by war would dissipate after about 18 months, limiting the size of an “oil dividend.” This prediction, as it happens, has not been borne out by events—oil is still well above its pre-war prices. But analysts believe that today’s prices may be due to other factors that were not considered before the Iraq war, includ­ing the disruptions caused by Hurricane Katrina. [...]

[**] I wonder whether the word “consensus” is appropriate.

[...] a general agreement among the members of a given group or community, each of which exercises some discretion in decision making and follow-up action.

[*] As I wrote this morning, firms see their internal prediction markets as a strategic forecasting tool.

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