Do businesses need enterprise prediction markets?

Competitive advantage can be obtained either by differentiation or by low cost. Enterprise prediction markets certainly don&#8217-t foster the innovation process, and they are surely not the cheapest forecasting tool. EPMs require special software, the hiring of consultant(s), the participation of all, and a budget for the prizes. EPMs are costly, and they take time to deliver. As of today, I can&#8217-t see why any sane CEO should be implementing EPMs as a decision-making support. At the contrary, I would say that any sane CEO should fire any employee who tried to sneak in internal prediction markets, and should dismember any existing corporate prediction exchange. Right now.

It has been suggested that EPMs have helped Best Buy getting it right on the ‘HD-DVD versus Blu-Ray’ issue. It&#8217-s a boatload of bullsh*t. I know a lot about technology intelligence. It should be done by a smart and curious operator. There is no need of enterprise prediction markets to do this task. The tools you need consist of a bunch of IT news aggregators and a good search engine. Consider this:

The Inevitable Move Of iTunes To The Cloud

In the &#8216-cloud&#8217- piece above, there are facts and there are speculations. You&#8217-ve got much more technology intelligence reading the &#8216-cloud&#8217- piece above than you would get from a crude, plain and simple prediction market. Gimme a break with EPMs. Make no sense at all.

Contrast EPMs (which are costly) with public prediction markets (a la InTrade or BetFair), where probabilistic predictions are offered for free. That makes all the difference for the reason that the added accuracy brought by prediction markets is very small. Market-generated odds are handed out for free to journalists &#8212-still, few of them take the bait. The market-powered crystal ball is worth peanuts.

The reason CEOs are paid millions is that only a small percent of the population of business administration managers has the ability to cut through the non-sense and the balls to cut the cost of the non-sense. It is a rare skill. I am calling on CEOs to end EPMs. Right now.

The truth about (enterprise) prediction markets

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Paul Hewitt:

[…] In virtually every case, the prediction market forecast is closer to the official HP forecast than it is to the actual outcome. Perhaps these markets are better at forecasting the forecast than they are at forecasting the outcome! Looking further into the results, while most of the predictions have a smaller error than the HP official forecasts, the differences are, in most cases, quite small. For example, in Event 3, the HP forecast error was 59.549% vs. 53.333% for the prediction market. They’re both really poor forecasts. To the decision-maker, the difference between these forecasts is not material.

There were eight markets that had HP official forecasts. In four of these (50%), the forecast error was greater than 25%. Even though, only three of the prediction market forecast errors were greater than 25%, this can hardly be a ringing endorsement for the accuracy of prediction markets (at least in this study). […]

To the despair of the Nashville imbecile, Paul&#8217-s analysis is quite similar to mine (circa February 14, 2009):

The prediction market technology is not a disruptive technology, and the social utility of the prediction markets is marginal. Number one, the aggregated information has value only for the totally uninformed people (a group that comprises those who overly obsess with prediction markets and have a narrow cultural universe). Number two, the added accuracy (if any) is minute, and, anyway, doesn’t fill up the gap between expectations and omniscience (which is how people judge forecasters). In our view, the social utility of the prediction markets lays in efficiency, not in accuracy. In complicated situations, the prediction markets integrate expectations (informed by facts and expertise) much faster than the mass media do. Their accuracy/efficiency is their uniqueness. It is their velocity that we should put to work.

Prediction markets are not a disruptive technology, but merely another means of forecasting.

Go reading Paul&#8217-s analysis in full.

I would like to add 2 things to Paul&#8217-s conclusion:

  1. We have been lied to about the real value of the prediction markets. Part of the &#8220-field of prediction markets&#8221- (which is a terminology that encompasses more people and organizations than just the prediction market industry) is made up of liars who live by the hype and will die by the hype.
  2. Prediction markets have value in specific cases where it could be demonstrated that an information aggregation mechanism is the appropriate method that should be put at work in those cases (and not in others). Neither the Ivory Tower economic canaries nor the self-described prediction market &#8220-practitioners&#8221- have done this job.

Velocity + Inaccuracy

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One bit of criticism about my pamphlet (The Truth About Prediction Markets) goes like this: Velocity without accuracy is dumb.

That is not true.

Let&#8217-s imagine, for the sake of the exercise, that Barack Obama does not pick up Kathleen Sebelius to head HHS. The velocity argument remains valid: Fed by the vertical media (in this case, Yahoo News republishing the Associated Press), the prediction markets integrated expectations (informed by facts and expertise) much faster than the mass media did.

Any argument about the velocity of the prediction markets cannot be contradicted. No way.

The HHS-Sebelius prediction market might be (yet) another case-in-point for documenting velocity.

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It is only today (February 19) that the New York Times emerges out of hibernation and headlines:

Kansas Governor Seen as Top Choice in Health Post. &#8212- Gov. Kathleen Sebelius is emerging as President Obama’s top choice for secretary of health and human services.

Now, look at the red line in the HubDub chart below: the prediction markets nailed her since the beginning of February 2009.

Of course, a scientific comparison would have scrutinized more closely than I did all the news articles from the New York Times (and from other mass media). That&#8217-s what we are going to do with the &#8220-Open Institute Of Prediction Markets&#8220-. To this end, I will set up a portable and distributed &#8220-Prediction Markets Consortium&#8221- in the coming days. Then, I will try to anchor it in an institution of higher education, and, after that, I will try to gather support from think tanks and foundations. Not an easy task, but I know now that I can count on many prediction market people and companies. It should be an industry endeavor &#8212-and it should deliver results, in the end (demonstrating the social utility of the prediction markets by documenting velocity, and, from there, following a logical thread which I will talk you about later on).

PS: About velocity&#8230- Remember that we are about the prediction markets versus the mass media (The New York Times, The Times of London, NBC News, BBC News, etc.) &#8212-as opposed to the vertical media (Politico.com, Nate Silver&#8217-s blog, PoliticalBetting.com, etc.). The distinction is very important to keep in mind.

UPDATE: The only stuff I can find about Sebelius for HHS is that February 9 piece from the Associated Press (which didn&#8217-t get a mass audience since it was not-republished in the New York Times or other mass media), saying that she was &#8220-near the top&#8221- for the job. Well, &#8220-near the top&#8221- is not like saying she was &#8220-on top&#8221-.

UPDATE #2: The Sebelius story is picking steam in the mass media. See Nate Silver&#8217-s take.

ADDENDUM: Andrew Gelman tells me that he thinks that &#8220-the Associated Press is a mass medium. It is a cooperative organized by a bunch of newspapers.&#8221- I think that the AP news articles do indeed reach a big audience when they are re-published or cited in the mass media. But in the Sebelius case above, it was not the case.

Previously: The truth about prediction markets

Who will be the next nominee of the HHS, now that Daschle has withdrawn from consideration?

No HHS contract on InTrade, BetFair or NewsFutures. :(

Prediction markets didnt revolutionize decision-making -and will never do. However, they are a nice condiment to the classic forecasting toolkit.

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I have spent several hours re-reading the 2004 AEI-Brookings book, &#8220-Information Markets&#8221- (by which they mean &#8220-prediction markets&#8221-). It is a collection of un-enlightening research articles &#8212-except for the IEM article, which is outstanding, both on the factual and theoretical sides.

In the conclusion of their introduction, Robert Hahn and Paul Tetlock wrote that they want their readers to contemplate the idea that prediction markets could make a &#8220-big&#8221- difference and &#8220-revolutionize public- and private-sector decision-making&#8221-. Well, 4 years later, it is clear that those big dreams didn&#8217-t pan out. Not a single mass media outlet has praised the public prediction markets for their work on the 2008 US presidential election (I am taking about a post-mortem analysis about Election Day, not the primaries). Not a single one. (Not even Justin Wolfers.) And the number of corporations using enterprise prediction markets is still minute. The thinkers who wrote this book (&#8220-Information Markets&#8221-) all made the mistake to put the emphasis on accuracy instead of efficiency. That was the foundation flaw. We should reset and reboot the field of prediction markets.

Previously: The truth about prediction markets

Do you have a blog?

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If yes, you could help by linking to our post:

– The truth about prediction markets

Thanks. Appreciated. I will make up to you.

These bloggers have already linked to it:

– Professor Mike Giberson-

– Professor Andrew Gelman-

Barry Ritholtz (the #1 Wall Street blogger)-

– JusTrade Blog-

– BetFair Predicts-

– Betting @ BetFair.

Velocity is such a potent argument. Why dont we use it more, for Christs sake?

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I am re-reading a 2007 scientific article from Region Focus’ Vanessa Sumo:

– Ask The Market – Companies are leading the way in the use of prediction markets. The public sector may soon follow. – (PDF)

Here is what I see on the frontpage:

– &#8220-one or two weeks in advance&#8220-

– &#8220-even up to five weeks in advance&#8220-

Marketing-wise, velocity is a much more potent argument than the argument on accuracy. Who cares about an added accuracy of +2.7% (and that&#8217-s debated)? If any, that&#8217-s peanuts.

You cannot make a case against velocity. Impossible.

UPDATE: Put the PDF link in the address box of your browser (as opposed to clicking on it, or right-clicking on it).

http://www.richmondfed.org/publications/research/region_focus/2007/spring/pdf/feature1.pdf