What is a prediction market? What is the utility of enterprise prediction markets?

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Consensus Point:

First, every market price is a prediction. Think of a familiar securities market such as a stock market. The price of a company’s stock is a forecast of the value of future dividend payments. A bond price is a forecast of the value of a defined set of interest payments, based on factors such as likelihood of default and future inflation. Second, markets generate forecasts in a very specific way – by aggregating and consolidating information from many individuals, often widely dispersed, each with access to small, idiosyncratic bits of relevant information.

This informational structure is very common in organizational life. Information within firms is often widely dispersed and undocumented, residing in the minds of employees. Junior level workers, for example, while perhaps knowing little about the overall set of strategic issues affecting their company, often have detailed understandings of isolated aspects of the business.

The fundamental challenges of corporate forecasting are to access and coordinate all relevant bits of information dispersed throughout a company and to consolidate them into a set of quantitative metrics that can be employed as forecasts.

But organizations impose significant constraints on the flow and processing of information. The hierarchy that defines organizational life often restricts the movement of information, from the bottom-up as well as across business units, and sometimes, because of various forms of “politics,” motivates the concealing of information or even the spreading of disinformation. When combined with well-documented effects such as human limitations in expressing complex thoughts and systematic biases in group decision-making, the result is that employees often do not reveal their honest assessments, sometimes because they’re not provided the opportunity and sometimes because they fear reprisal for offering an unpopular opinion. Forecast quality suffers.

Prediction markets offer firms the opportunity to incorporate the information aggregating and predictive power of markets within corporate structures relying primarily on top-down direction. A prediction market is established within a company to generate predictions on issues of interest to managers in a manner that directly addresses the foundational communication constraints within firms.

A “stock” is defined to reflect an issue of interest to managers, perhaps unit sales of a product over a specified future time period. A group of employees – perhaps salespeople and marketing personnel -are selected to participate as traders on the basis of their perceived understanding of future sales prospects. Using software that is commercially available and run as an internet (or intranet) application, the participating employees are provided trading accounts, the stock is assigned an initial value (perhaps reflecting management’s current expectation of sales in the defined period) and a currency is established to provide a medium for exchange.

With the protection of anonymity (eliminating the fear of reprisals for offering unpopular opinions) and a well-defined incentive structure, employees are motivated to acquire relevant information and contribute their best assessments. They buy and sell shares of the security based on their beliefs about future sales prospects and their desire to increase the value of their portfolio. When an employee, for example, observes that the price of the stock is less (or more) than his/her expectation of future sales, he/she will buy (or sell) the stock, thereby driving its price up (or down).

As a result of this dynamic, the stock price serves as an ongoing real-time forecast of future sales. It continuously reflects traders’ aggregated assessment of future sales of the product, in the same way that the trading of a company’s stock on a stock exchange continuously reflects the trading community’s collective assessment of the value of the company.

Several internet-based prediction markets have been functioning for many years, and many companies have implemented prediction markets internally. Performance comparisons reveal that such markets produce forecasts that are more accurate than those from traditional systems.

Prediction markets not only produce forecasts and assessments that are, on average, more accurate than those produced from traditional forecasting approaches at any point in time (because they incorporate more information and less disinformation), but also, because the markets function continuously, will reveal the impacts of new information far faster than any alternative approach. Because the usual disincentives for employees to reveal bad news to managers have been eliminated, this system can in some instances serve as an effective “early warning system.”

The informational content of a prediction market is not limited to the stock price. The underlying bid data can be examined for insights into the knowledge and the beliefs of specific employees and groups within the organization. Analysis of market transactions in prediction markets will identify areas where there is substantial disagreement among employees about future values of key parameters driving the firm’s strategic decisions. Such disagreement, reflecting a collective uncertainty about underlying factual premises and/or interpretations, will highlight areas where the incremental value of additional managerial attention, in the form of information gathering (including perhaps discussion with select employees) and/or analysis, will be particularly high.

There are additional benefits of prediction markets – such as improved decision-making on personnel issues and improved employee morale – that can be realized with the most force when the markets are employed for long time horizons.

Thanks to David Perry of Consensus Point for allowing me to republish this explainer.

Exago Markets, Portugal, E.U.

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As I understand it:

– Prediction market consultancy in Portugal-

– They probably licensed Xpree&#8216-s software for enterprise prediction markets. UPDATE: They created their own software for enterprise prediction markets.

Best wishes to them.

NewsFutures Enterprise Prediction Market Workshop, NYC, 10/27

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For aspiring practitioners and those intrigued by the applications of collective intelligence in the workplace, the typical prediction markets conference can be frustrating for lack of focus on practical knowledge and hands-on experience with the tools. That&#8217-s why NewsFutures is organizing a Wisdom of Crowds Consulting Workshop, in New York City, on October 27.

It is designed primarily for business consultants who would like to acquire working knowledge of &#8220-WOC&#8221–based solutions, or for the manager looking for some hands-on experience while considering the potential of this approach for his or her company.

The one-day program will cover:

  • Foundations
    Prediction Markets and Wisdom of Crowds 101: principles, mechanisms, evidence, and applications
  • Applications
    Case studies in strategy, forecasting, innovation, and project management
  • Tools
    Hands-on experience with various wisdom-of-crowds software tools: Prediction Markets, Competitive Forecasting, Idea Pageant, and Impact Matrix
  • Practice
    Keys to a successful implementation: information, integration, inclusion, interface, and incentives
  • Collaboration
    Nuts and bolts of working with NewsFutures

If you are interested, please follow this link for more information about the venue and how to register.

I look forward to seeing you in NY, home of the world&#8217-s financial meltdown!


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Google PageRank of the main Prediction Market Consultants

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Inking Markets and NewsFutures are graded 6 / 10.

Consensus Point and Xpree are graded 5 / 10.

My great friend David Perry of Consensus Point is making a strategic mistake by insisting on discretion and secrecy.

I told him 10 times.

To no avail.

Pissing in a violin in order to create a symphony would have been more fruitful.

PageRank is important.

One day, we will learn in the Wall Street Journal that a Fortune-500 CEO is fired by the board for a low PageRank.

That will happen one day- you will see.

The Prediction Market Consultants

Inkling Markets Advisory Board… which does not want to tell its name

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Via Daniel Horowitz (Business and Technology Consultant)

Inkling Markets&#8217- Advisory Board (curiously named &#8220-Friends Of Inkling&#8221-):

  1. Bo Cowgill, Google Inc. &#8212- Product developer, expert on decision markets for Google- creator of Google&#8217-s prediction market and co-author of Using Prediction Markets to Track Information Flows: Evidence From Google.
  2. George Gendron, Clark University &#8212- Founder and director of the Innovation and Entrepreneurship Program at Clark University- former Editor-in-Chief of Inc. magazine.
  3. Our Michael Giberson. :-D &#8212- His recently updated website states: *Update:* Beginning in August, 2008, Michael Giberson will be joining the faculty of the Center for Energy Commerce in the Rawls College of Business, Texas Tech University.
  4. Bob Johansen, Institute for the Future &#8212- Author of Get There Early: Sensing the Future to Compete in the Present and six other books- Distinguished fellow and former CEO of Institute for the Future (IFTF), a Palo Alto based think tank that does ten-year forecasting.
  5. Jane McGonigal, PhD, renowned gaming developer &#8212- Award-winning innovative game designer, researcher and analyst. MIT Technology Review named her as one of the top 35 innovators changing the world through technology.
  6. Russ Roberts, management consultant and professor, Northwestern University &#8212- A strategy and organization effectiveness consultant and professor at the Kellogg Graduate School of Management at Northwestern University.
  7. Philip Rosedale, Linden Lab / Second Life &#8212- Founder and chairman of Linden Lab, creator of the acclaimed 3D virtual world Second Life. In 2007, he was listed among Time Magazine&#8217-s 100 Most Influential People in the world.

Impact Matrix. Used to collect and gauge the likelihood and business impact of various events in the very long term.

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My republishing of the brand-new NewsFutures explainer was the most popular Midas Oracle story this morning.

The sentence in the title was the most talked about. Many Deep Throats offered me their conjectures. Emile is quite a smart man.

Previous blog posts by Chris F. Masse:

  • The best research papers on prediction markets
  • 2008 Electoral Map
  • American Enterprise Institute’s Center For Regulatory And Market Studies (Policy Markets)
  • IIF’s SIG on Prediction Markets
  • Science
  • Why did prediction markets do well in the pre-polling era, professor Strumpf?
  • Mozilla FireFox users, do you have trouble downloading academic papers (as PDF files) from SSRN?

Innovation Mechanism = Voting Mechanism + Prediction Market Mechanism

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Xpree&#8217-s Mat Fogarty (responding to Jed Christiansen, even though Jed didn&#8217-t talk to him but to Emile Servan-Schreiber :-D &#8212-argh, kids, today, interrupting adults&#8217- conversations :-D ):

We have had success combining voting to rank the ideas, then prediction markets to analyze the potential of the top ranked ideas. The phrasing in the prediction market needs to be quite specific, if we invested in idea A, how long would it take to get to market? how much would we sell in the first year? If the company does not invest in idea A, then the money bet in the market is returned to the user.

With long development cycles this can be challenging as it requires keeping the market active until ship, or for the sales estimate, one year after ship.

Of course, you could use a preference market – but this has issues of information cascades and rewarding of group think.


Here&#8217-s the Xpree stuff which Mat is talking about.

Previous blog posts by Chris F. Masse:

  • Since YooPick opened their door, Midas Oracle has been getting, daily, 2 or 3 dozens referrals from FaceBook.
  • US presidential hopeful John McCain hates the Midas Oracle bloggers.
  • If you have tried to contact Chris Masse thru the Midas Oracle Contact Form, I’m terribly sorry to inform you that your message was not delivered to the recipient.
  • “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.”
  • Meet professor Thomas W. Malone (on the right), from the MIT’s Center for Collective Intelligence.
  • Tom W. Bell rebuts the puritan and sterile petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, the bright masterminder of the Iraq war).

STRAIGHT FROM THE DOUBLESPEAK DEPARTMENT: NewsFutures CEO Emile Servan-Schreiber, well known to chase tirelessly the Infidels who dare calling prediction markets their damn polling system, is eager to sell the confusion to his clients and whomever would listen.

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Emile&#8217-s made up a phrase that means nothing (except in his fertile imagination), &#8220-a proprietary prediction market variant&#8220- &#8212-sounds like a red herring to me.

Unlike Consensus Point, Inkling Markets and Xpree, NewsFutures is the only prediction market software vendor not to have adopted Robin Hanson&#8217-s MSR &#8212-a simplified trading technology now in use in most enterprise prediction markets.