Tag Archives: private prediction markets

Obstacles to Prediction Market Adoption

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BusinessWeek:

Harrah&#8217-s is setting up a pilot prediction market to forecast customer activity in one of its domestic casino operations. […]

Since the power of prediction markets hinges on effectively tapping into cognitive diversity throughout an organization, Page also argues convincingly that if members of a group do not have enough diversity in their perspectives, prediction markets can actually produce dismal results. […]

Until now, few of the companies sponsoring successful pilots or tests have deployed prediction markets on a broad or sustained basis. Why not? One explanation is that prediction markets are deeply subversive. After all, lots of midlevel executives are consumed with the task of forecasting. If prediction markets do a better job of it, doesn&#8217-t that discredit the efforts (and perhaps even the motives) of these executives? But as prediction markets shift their focus toward new knowledge creation, they may become less threatening within corporations. […]

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I don&#8217-t buy this explanation &#8212-nor do I buy that other one.

My view is that we haven&#8217-t yet demonstrated clearly when and how prediction markets can be useful.

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Are collective intelligence solutions being oversold?

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Xpree CEO Mat Fogarty:

Chris,

Management struggles to understand and plan for the future. When forecasts are inaccurate, corporations incur huge costs due to inventory write-offs, stock-outs, misallocated resources or cost of capital. Collective intelligence delivers objective, accurate forecasts in real time, thus saving many millions of dollars for our corporate clients. The solution is not being oversold, to the contrary, the potential vastly exceeds current awareness and adoption.

&#8220-If foresight is not the whole part of management, at least it is an essential part of it&#8221- (Henri Fayol, 1916).

In my 10 years experience as a management accountant and corporate planner, I have witnessed multiple forecasts suffer from inaccuracy due to uncertainty and biases. Whether forecasting a launch date, sales volume or cost of development, it is the systematic biases due to incentive systems, politics and common cognitive errors that contribute more to inaccuracy than the uncertainty. The problem stems from the fact that the owner of a forecast is normally the owner of the business unit / sales team / project, and budgets and bonuses are based on forecasts. This necessitates game playing and politics and makes the development of an objective, accurate forecast near impossible.

Collective intelligence can overcome these problems by incentivising a diverse crowd of knowledgeable employees to share their insight, balancing the resulting estimates, and rewarding accuracy and timeliness.

However, we are at an early stage in the development of this opportunity. There is still work ahead of us to develop the ideal mechanism to combine simplicy of UI [user interface] with richness of information gathering. In addition, we need to further develop the way collective intelligence interfaces with traditional corporate structures, processes and systems. These are Xpree&#8217-s challenges&#8230- stay tuned.

Mat
CEO, Xpree

Enterprise prediction markets help organizations mitigate risks.

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IT Business Edge – (I love the name of this magazine):

Seeking opinions from a diverse group of employees rather than just the usual decision-makers helps organizations mitigate risk, says Adam Siegel, co-founder and CEO of Inkling, Inc., a provider of prediction market software. “You want as much information as possible upfront so you can react to possible problems,” he says.

Siegel reads the 10K statements of potential clients to help identify their hot-button issues. When they express interest in the markets but wonder what kinds of questions to pose, he suggests establishing markets examining risk factors such as how pricing fluctuations affect the market for a company’s products or how acquisitions may impact the competitive landscape.

A drawback of prediction markets is that they won’t reveal the factors behind the bets. But, says Young, “If a red flag is raised about a particular issue, it’s not hard to go back and investigate” to determine the root causes of problems. “The bigger problem for most companies is they just don’t know what’s going to happen, and the red flag never goes up.”

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– Excellent article.

– If you have missed our previous post, see here our little excerpt of the Forrester report.

– Adam Siegel is CEO of Inkling Markets, as you all know. His company website is very interesting to read. If you have never done it, do it right now. The general concept of prediction markets is explained, and they go down and dirty on how to set up your own enterprise prediction markets.

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Enterprise Prediction Markets = The wisdom of crowds comes to the enterprise.

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Here are short excerpts of the Forrester report on enterprise prediction markets and companies that provide software for enterprise prediction markets (e.g., Consensus Point &#8211-see the full list of providers at the bottom of this post).

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The Forrester executive summary:

The &#8220-wisdom of crowds&#8221- is capturing the attention of corporate strategists across the globe, and, as a result, many are now looking to prediction markets — speculative markets in which traders collectively predict future events — to generate collective intelligence. For enterprises, prediction markets bring unique value: They focus on the future, aggregate diverse information pools that can be applied to multiple decision-making domains, create streams of actionable data suitable for executive decision-making, and can often cut through corporate politics and pressures at lower cost than traditional forecasting methods. Market researchers will, however, need to have an active hand in the management of these mechanisms, ensuring strong management support, the right incentives for traders, and a focus on appropriate questions. When executed properly, the value to the enterprise is enormous- as a result, Forrester believes that prediction markets will ultimately find a permanent home in the market research toolbox.

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For information on hard-copy or electronic reprints, please contact the Client Resource Center at +1 866.367.7378, +1 617.617.5730, or resourcecenter &#8211-at&#8211- forrester &#8211-dot&#8211- com. We offer quantity discounts and special pricing for academic and nonprofit institutions.

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My remark about the Forester report:

– It&#8217-s a very good document.

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APPENDIX #1: Prediction Markets – DRM Review

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APPENDIX #2:

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Here is a list of companies that provide software for prediction markets:

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Inkling Markets – (MSR + AMM)

NewsFutures – (CDA + optional AMM + SR)

Consensus Point – (CDA + MSR + AMM)

Xpree – (MSR + AMM)

Zocalo – (CDA + MSR + AMM) – (open-source)

Nosco – (CDA + MSR + AMM)

QMarkets – (MSR + AMM)

Ask Markets – (MSR + AMM)

Exago Markets – (CDA + optional AMM)

Gexid – (?)

ProKons – (?)

Spigit – (?)

HSX Virtual Markets – (Virtual Specialist + AMM)

HubDub – (MSR + AMM) – (not licensed)

Yahoo!&#8217-s Prediction Exchange – (MSR + AMM + DPMM) – (not licensed)

Google&#8217-s Prediction Exchange – (CDA) – (not licensed)

MicroSoft PredictionPoint – (MSR + AMM) – (not licensed)

InTrade – (CDA + AMM for play money) – (not licensed)

TradeSports – (CDA + AMM for play money) – (not licensed)

Iowa Electronic Markets – (CDA) – (not licensed)

HedgeStreet – (CDA) – (not licensed)

TradeFair – (CDA) – (not licensed)

BetFair – (CDA) – (not licensed)

Trading Technologies International – (CDA) – (not for event derivatives)

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Here&#8217-s a list of prediction market consultants:

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Robin Hanson – (George Mason University, Virginia, U.S.A.)

  • Robin Hanson does prediction market consulting work, and have no exclusive arrangements.
  • &#8220-I&#8217-m more interested in helping groups that want to add lots of value to big decisions, versus groups that just want to dabble in a new fad.&#8221-

Inkling – URL: Inkling Markets – (Chicago, Illinois, U.S.A.)

  • Adam Siegel
  • Nathan Kontny

NewsFutures – (Maryland, U.S.A. &amp- Paris, France, E.U.)

  • Emile Servan-Schreiber — Post Archive at Midas Oracle
  • Maurice Balick

Consensus Point – (Nashville, Tennessee, U.S.A. &amp- Calgary, Alberta, Canada)

  • David Perry
  • Ken Kittlitz, who co-founded the Foresight Exchange in 1994.

Xpree – (California, U.S.A.)

  • Mat Fogarty

Chris Hibbert – (California, U.S.A.)

  • Chris Hibbert (Software architect / Zocalo project manager) — Post Archive at Midas Oracle
  • Chris Hibbert&#8217-s personal website — Chris Hibbert&#8217-s personal blog —
  • Chris Hibbert&#8217-s CommerceNet profile — (His stint there ended in mid 2006.)

Justin Wolfers – (University of Pennsylvania&#8217-s Wharton Business School, Pennsylvania, U.S.A.)

  • Justin Wolfers takes on prediction market consulting work.
  • The prediction market industry is &#8220-a case where the interaction between firm practice and academic research are reasonably close.&#8221-

Koleman Strumpf – (University of Kansas, Kansas, U.S.A.)

  • Koleman Strumpf — Post Archive at Midas Oracle
  • Koleman Strumpf can be approached to consult on prediction market projects.
  • &#8220-Prediction markets help harness the knowledge of diverse groups. They have great potential as a tool for industry.&#8221-

Nosco – (Danemark, E.U.)

  • Jesper Krogstrup
  • Oliver Bernhard Pedersen

Qmarkets – (Israel)

  • Noam Danon

Ask Markets – (Greece, E.U.)

  • George Tziralis — Post Archive at Midas Oracle

HP Services &amp- HP Labs – (U.S.A.)

  • Predicting the future &#8211-with games — Introductory article
  • Information Dynamics Lab — Internal prediction markets
  • BRAIN – (Behaviorallly Robust Aggregation of Information in Networks) — Scoring Rules (i.e., non-trading technique)
  • Bernardo A. Huberman – Bernardo Huberman – Senior Fellow &amp- Director
  • Kay-Yut Chen –
  • Google Search for &#8220-prediction markets&#8221-

Hollywood Stock Exchange (HSX) &amp- HSX Research – (L.A., California, U.S.A.)

  • Prediction market consultancy firm
  • Movie business

IntelliMarket Systems – (L.A., California, U.S.A.)

  • Charles R. Plott – Charles Plott – (CalTech Inst., California, U.S.A.)

Gexid – Global Exchange for Information Derivatives – (Germany, E.U.)

  • Bernd Ankenbrand — Post Archive at Midas Oracle

ProKons – (Germany, E.U.)

  • Peter Gollowitsch

Exago Markets – (Portugal, E.U.)

  • Pedro Da Cunha

NimaniX – (Israel)

  • Elad Amir (CEO), Littal Shemer Haim (VP Business development), David Shahar (VP R&amp-D)

Michael Giberson – (Texas, U.S.A.)

  • Michael Giberson (Energy Economist – Center for Energy Commerce, Rawls College of Business, Texas Tech University) — Post archive at Midas Oracle
  • Knowledge Problem – Blog on economics, energy policy, more.

Other Consulting Firms

McKinsey – (U.S.A.)

  • Google Search for &#8220-prediction markets&#8221-
  • The Promise Of Prediction Markets – by McKinsey – 2008-04-XX

Accenture – (U.S.A.)

  • Google Search for &#8220-prediction markets&#8221-

Gartner – (U.S.A.)

  • Google Search for &#8220-prediction markets&#8221-

Forrester – (U.S.A.)

  • Google Search for &#8220-prediction markets&#8221-
  • Prediction Markets: Wisdom Of The Crowd Comes To The Enterprise. – 2008-07-14

The Boston Consulting Group – (U.S.A.)

  • Google Search for &#8220-prediction markets&#8221-

CapGemini – (U.S.A.)

  • Google Search for &#8220-prediction markets&#8221-

KPMG – (U.S.A.)

  • Google Search for &#8220-prediction markets&#8221-

Price Waterhouse Cooper – (U.S.A.)

  • Google Search for &#8220-prediction markets&#8221-

Ernst &amp- Young – (U.S.A.)

  • Google Search for &#8220-prediction markets&#8221-

Deloitte – (U.S.A.)

  • Google Search for &#8220-prediction markets&#8221-

IBM – (U.S.A.)

  • Google Search for &#8220-prediction markets&#8221-

EDS – (U.S.A.)

  • Google Search for &#8220-prediction markets&#8221-

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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.

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

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Robin Hanson is now Chief Scientist of Consensus Point.

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Robin Hanson is now Chief Scientist of Consensus Point.

Here&#8217-s the expanded list of Consensus Point customers &#8212-Fortune-500 firms, mainly.

Here&#8217-s their definition of what is a prediction market.

Here&#8217-s their product page.

With Inkling Markets and NewsFutures, Consensus Point is the co-leader in the enterprise prediction markets space.

Best wishes to all of them.

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.

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that growth rate just isn’t as high as I wish it would be.

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As soon as that un-informed comment hit Google Reader, I received, in my e-mail inbox, proof that some prediction market vendors are doing very well lately, as prestigious Fortune-500 companies have been joining the ranks of organizations trying out enterprise prediction markets as their internal forecasting tool. Some of these names will be made public later on, I hope.

All the prediction market vendors I know of are bullish.

Coalition for Internal Markets (CIM)

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Bo Cowgill:

Google and Yahoo are working with a number of other companies to join us for a larger announcement. We already have some lined up, and are looking for more. Some Midas Oracle readers might have already been contacted or will be contacted shortly &#8212- we are still interested in working together.

Stay tuned! If your company would like to support our effort (or if you know someone at a company that might be interested), please be in touch.

Also:

1. Although our coalition is called &#8220-Coalition for Internal Markets,&#8221- our petition discusses public markets used for business as well.

2. The signatories from Google and Yahoo! were Hal Varian and Preston McAfee, two senior execs and Chief Economists at Google and Yahoo.

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!