Gartner: The “benefit” of enterprise prediction markets is “moderate” and “early users, who have begun to overestimate their accuracy and overall usefulness, are now somewhat disillusioned with the technology.”

Gartner – Hype Cycle for Social Software, 2008 – (PDF file):

Prediction Markets

Analysis By: Matthew Cain; Nikos Drakos

Definition: Prediction markets are betting mechanisms established to forecast the outcome of an ongoing issue of contention, such as quarterly sales or product delivery dates. They can also be used to prioritize ideas (users bet on which ideas have the greatest chance of success) or to assess risk (users bet on which paths carry the least risk). While popular on the Web for predicting election results (among other things), and popular among gamblers (will an EU nation boycott the Olympics, for example), [prediction] markets are now entering the business world. Users are typically given a finite amount of money (often play money) and they buy shares in the outcome they believe most likely. Outcomes that attract the most money create a forecast based on a consensus opinion which, in many cases, has proven more accurate than traditional means of forecasting.

Position and Adoption Speed Justification: While the value of [prediction] markets are well codified (used in the proper circumstances), mainstream awareness of the technology is minimal. Larger organizations, mostly technology and pharmaceutical firms, were the first to adopt the technology, but it has been slow to spread to other vertical markets. [Prediction] markets are positioned on the upper part of the Trough of Disillusionment because early users, who have begun to overestimate their accuracy and overall usefulness, are now somewhat disillusioned with the technology.

User Advice: Organizations looking to improve forecasting of contentious issues where multiple users have valid insight into the issue are likely to benefit from investments in [prediction] markets. A learning curve will be in effect as organizations determine which circumstances and participants are most likely to result in accurate forecasts. Organizations will also strive to find the most appropriate incentives to yield the most accurate forecasts: one theory, for example, holds that use of fake money results in inferior results compared to real money. Besides numerous premises-based commercial (and open-source) vendors, there are multiple suppliers that offer [web-]hosted [prediction] markets, enabling exposure to the technology for minimal investment.

Business Impact: [Prediction] markets can help more-accurately model outcomes for sales efforts, product delivery dates, product uptake rates, manufacturing capacity needs, product ideas, marketing campaigns and competitive actions, for example. It is unlikely to be of help when the number of knowledgeable [bettors] is limited, when outcomes have a high degree of predictability, or when the outcome can arbitrarily be determined by a small number of people. Prediction markets are most valuable when they are used to rationalize a large number of disparate viewpoints. Potential users should start with pilot programs so they can compare the results with traditional forecasting mechanisms.

Benefit Rating: Moderate

Market Penetration: Less than 1% of target audience

Maturity: Emerging

Sample Vendors: [See the updated Midas Oracle list]