Bet on It! – (page two – page three + a crappy listing of exchanges) – by Steven Cherry
In August 2004, Todd Proebsting, a researcher in Microsoft’s platform and services division, was approached by a manager in the company’s testing organization who had spent months helping to create a piece of software to be used by other Microsoft programmers. Although it was an internal product, the software still had a rigid development schedule and an official launch date: November 2004, just a few months away. The manager had heard a talk by Proebsting about something called a prediction market, a sort of stock market for ideas, in which Microsoft employees would in effect place bets on predictions, instead of on racehorses or football teams. A lot was riding on the timely completion of the testing software. “You said that a market could be used to predict schedules,†the manager said. “I want to know when my team will finish writing the software.†Proebsting created a market with six possible bets: that the product would ship before November, in November, in December, in January, in February, or later than February. His pool of bettors included members of the development team itself, other developers, and program managers from related teams, as well as internal “customersâ€â€”the programmers within Microsoft who would use the software. He showed them all how to use the market, gave them each US $50 with which to wager, and then sat back and watched prices fluctuate. “All six months were started equally at 16 2/3 cents on the dollar,†Proebsting says, meaning that you only had to bet that amount to win $1 if you were right. “Within seconds, the pre-November market went to $0.00 and never moved from there.†So much for beating the deadline. “The November date went down to 1.2 cents in about 3 minutes.†So much for meeting the deadline. “The director of the group came to see me. He asked, ‘What have you done?’?†“No one believes your product will ship on time,†Proebsting told him. The director replied, “No one on the team is telling me this.†After discussing things with his development team, the director came to accept what the market was “saying.†He decided to cut some of the software features that were holding things up. “And the price of the markets started to reflect that—the November price rose,†Proebsting says. “Then the internal customers got wind of the fact that some of their favorite features were being cut and demanded their features back. So the market then reflected that!†In other words, the markets that predicted the software would be very late went back up. “In the end,†Proebsting says, “the product shipped in February, which is what the market predicted.†[...]
Chris F. Masse, a [] consultant in Sophia Antipolis, France, who specializes in prediction markets, says that by 2010, “10 percent of Fortune 500 companies will have gone public about their use of internal prediction markets, and probably another 10 percent will be testing some projects.†[...]
Henry Berg, who runs the Information Markets group within Microsoft, notes that in many cases a company has no formal prediction methods in place. “An organization adopting prediction markets needs to make two major adjustments: deciding to start making formal predictions about the future and choosing to use prediction markets as the mechanism,†Berg says. “In my experience, the first adjustment is greater than the second.†[...]
BetFair, NewsFutures and HSX Research are not cited. 
Other than that, it’s a nice article. — Bet on It! – (page two – page three) — Via Steve Roman
What’s more, we find out that the mysterious Chris Masse is a “financial consultant.” Excellent! Share more, please.
The article is sloppy in parts, for example:
Formal research in prediction markets goes back at least to the storied economist Friedrich Hayek. As early as 1948, Hayek wrote about the ways that free markets emit information. By the late 1980s, Robin Hanson at George Mason University, in Fairfax, Va., and other researchers elsewhere had begun to study market behavior under controlled laboratory conditions.
While Hayek may deserve credit for insights useful in the understanding of prediction markets, I wouldn’t quite put him in the category of “formal research in prediction markets.” In the late 1980s, Robin Hanson was not yet at George Mason University, and the University had not yet established an economics laboratory. (Hanson arrived at GMU in 1999, the economics lab was created in 2001.)
In May, Intel published the results of a comprehensive 18-month study of prediction markets.
The consensus here seemed to be that Intel was using an information aggregation method that was not technically a prediction market (not that there is anything wrong with that). (Though the paper itself was confusing on the point.)
So how do prediction markets typically work? First of all, they use real money. That’s important for keeping bettors honest.
Second of all, some don’t use real money.
Corporate prediction markets work the same way. Real money or some other trinkets are still necessary, … Using real money is a double-edged sword, however—it can also motivate people to manipulate the market, … For that reason, and because companies don’t want to run afoul of insider trading laws, some markets limit the amount of money involved. Others use fake money, issuing modest prizes ….
So, a bit sloppy.
Nonetheless, the article runs over a pretty good list of prediction market stories, and as long as you are not relying on the details, it does makes a reasonable introduction.
Bo, the adjective “financial” should be omitted.
Mike, their errors on the Intel paper is understandable since it uses 15 times the term “prediction markets”.
Mike, I, too, was disturbed when they said that firms used real money. In fact, they use play money convertible partially in gifts or bonuses.
Yes, it is a good panorama of PMs. Good that the techies will read that. A pity that there are no links.
And I wonder how he came up with that tidbit about “the Zocalo project, which is run by software engineer Chris Hibbert and affiliated with North Carolina State University. I have no affiliation with NCSU. As far as I can tell, I’ve never communicated with anyone from that school. The formal affiliations of Zocalo are limited to CommerceNet. Informally, I’ve worked with people from George Mason University.
As usual, press reports seem fairly accurate on the broad story, and possibly the details that I don’t know about specifically. But the details that I do know explicitly are wrong. Oh well, you can find Zocalo as long as you give Google any of the other details to work from.