[T]he “truth grounding†of prediction markets serves to avoid the self-reinforcement described above.
If a market, grounded on a real outcome, says A=90% and B=10% one day before expiration, and I believe that B is the real winner, then I will bet on B.
In this poll-like question, it makes no sense whatsoever to bet on B. The A will be the winner just due to the fact that the winner will be determined by which contract is leading at the expiration (in this case it will be A), not by which technology is going to be the true winner.
So, as a player I have no incentives to reveal my true beliefs. Instead I have all the incentives to follow the crowd in a bubble.
Remember: The crowd gives good decisions when each player thinks for itself and has the incentives to do so.
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ADDENDUM: Five hours after we published on the IBM Smarter Cities (tipped by a Twitter Direct Message from Hutch Carpenter), InTrade borrowed our info without thanking us for the tip, and published a tweet, labeling them as “prediction markets” (as Midas Oracle did originally, since I made the stupid mistake to put more weight in Spigt’s unscientific marketing prose than in my own critical reasoning). But Midas Oracle corrected the original post, thanks to David Pennock and Panos Ipeirotis, and Midas Oracle published another post stating my mistake. As for InTrade, they never published a correction, and they never published a new tweet establishing the truth, namely that the IBM Smarter Cities system is actually not powered by a market mechanism. InTrade has a history of not acknowledging the mistakes they make. They also have a history of siphoning Midas Oracle without crediting us, but that’s another story.
UPDATE: And InTrade post another tweet about IBM Smarter Cities “prediction markets”…
UPDATE: Jed Christiansen’s post
Jed:
http://blog.mercury-rac.com/2009/08/30/starting-from-the-wrong-metaphor-prediction-markets-and-ideas/