# Derren Browns lottery win = A split camera trick disguised as wisdom of crowds

On 9 September 2009, [British illusionist] Derren Brown conducted a live TV broadcast in which he suggested that he had successfully predicted the winning National Lottery numbers prior to them being drawn. During the broadcast a number of blank lottery balls were displayed on a glass stand in clear view of the camera, and after the lottery draw had been made, the balls were rotated to reveal the winning numbers. It was claimed by Derren Brown that the only other people in the studio were two camera operators, to avoid legal issues, and that the stunt had been authorised by Camelot, the National Lottery operators.

Great Britain is buzzing like crazy about the stunt.

He claimed it was based on an old trick which tells how a crowd of people at a country fair accurately estimated the weight of an ox when their guesses were all averaged out. He gathered a panel of 24 people who wrote down their predictions after studying the last year&#8217-s worth of numbers. Then they added up all the guesses for each ball and divided it by 24 to get the average guess. On the first go they only got one number right, on the second attempt they managed three and on the third they guessed four. By the time of last week&#8217-s draw they had honed their technique to get six correct guesses, and these were the numbers shown on the Wednesday night programme. [Derren] Brown claims that the predictions were correct because of the &#8220-wisdom of the crowd&#8221- theory which suggests that a large group of people making average guesses will come up with the correct figure as an average of all their attempts. He also suggested that if the people were motivated by money, it may not work.

Well, we know a lot about the &#8220-wisdom of crowds&#8220-, here, as Midas Oracle specializes in collective intelligence. The idea of the &#8220-wisdom of crowds&#8221- is to aggregate bits of information that are dispersed in a population of independently minded individuals. The result of that information aggregation is a predictive power slightly superior (on average, over the long term) to what one single individual can produce &#8212-even a gifted one. However, the &#8220-wisdom of crowds&#8221- is not powerful enough to predict the future with 100% certainty. For that, you would have to reverse the psychological arrow of time &#8212-so as to remember the future as opposed to the past. Physicists tell us this is impossible in our universe. Hence, Derren Brown used a trick [WATCH THE 3RD VIDEO BELOW] &#8212-and concealed it with some blahblah about the &#8220-wisdom of crowds&#8221-.

&#8220-Check the ball on the right after Derren Brown says &#8216-23&#8242-. Notice it mysteriously jumps up and is slightly higher than the other 5 balls. (apologies for the camera wobble but my camera is on a tripod, the wobble is from the camera on the show which is programmed to wobble so you can&#8217-t see the switch of the balls). So no magic, NLP, psychology or mind-tricks. Just good old fashioned camera trickery. &#8221-

For the tip, thanks to Emile Servan-Schreiber of NewsFutures &#8212-we&#8217-re impatient to see the new version of their software / prediction market website.

UPDATE:

His next event: Trying to beat the casino.

Another video

Another video

# Flawed New Hampshire polls = Non-accurate New Hampshire prediction markets

The most comprehensive analysis ever conducted of presidential primary polls:

&#8220-a handful of methodological missteps and miscalculations combined to undermine the accuracy of predictions about presidential primary winners in New Hampshire and three other states.&#8221-

Via Mister the Great Research Scientist David Pennock &#8211-who is an indispensable element of the field of prediction markets.

As I blogged many times, prediction markets react to polls&#8230- See the addendum below&#8230- – [UPDATE: See also Jed’s comment.] – Prediction markets should not be hyped as crystal balls, but simply as an objective and continuous way to aggregate expectations. So, if you think of it, their social utility is much smaller than what the advocates of the &#8220-idea futures&#8221-, &#8220-wisdom of crowds&#8221- or &#8220-collective intelligence&#8221- concepts told us. Much, much, much, much smaller&#8230- They all make the mistake to put accuracy forward. (By the way, somewhat related to that issue, please go reading the dialog between Robin Hanson and Emile Servan-Schreiber.)

What you&#8217-re doing is collecting bits and pieces of information and aggregating it so we can watch it and understand what people know. People picked this up and called it the &#8220-wisdom of crowds&#8221- and other things, but a lot of that is just hype.

New Hampshire – The Democrats

The Hillary Clinton event derivative was expired to 100.

New Hampshire – The Republicans

The John McCain event derivative was expired to 100.

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# Enterprise prediction markets: Usability innovation is the answer.

This past week, The Economist wrote on the yet-unfulfilled promise of prediction markets. At CrowdCast (ex-Xpree), we believe prediction markets are not yet mainstream because the current solutions are built on mechanisms designed for the stock market, not for the enterprise.

The stock trading metaphor works for a large, liquid stock market, but is unsuitable for enterprise forecasting. The concept of shorting and covered calls is far from intuitive for your average employee, and the stock mechanism makes it hard to ask the simplest of questions relevant for corporate forecasters. For example, buying or selling a collection of virtual stocks representing probabilities of sales falling in particular ranges is an incredibly obtuse way of asking for a single sales forecast. Finally, the stock mechanism relies on copious liquidity to ensure meaningful metrics, which is often not available with the limited crowds available in the enterprise.

However, innovation moves on and we question the assumption that prediction markets have to rely on the stock market analogy. At CrowdCast, we have been working on a new mechanism, that takes into account participant behavior and aptitude as much as market efficiency. The product we are launching in April will deliver easy, engaging, and expressive information exchanges, without the limitations of traditional notions of stock markets.

When you get the questions, incentives, and mechanism right, a prediction market can be an incredibly powerful management tool. Employees share insights anonymously and are measured and rewarded for their intelligence. Widely deployed, this has the potential to fundamentally change the nature of the organizational contract, moving from information flow based on hierarchy and silos, to enterprise-wide direct communication.

A whole new take on prediction markets- available from CrowdCast in April 2009.

Mat Fogarty

CrowdCast CEO

Cross-posted from the Xpree blog

Previously: Are collective intelligence solutions being oversold?

# The truth about prediction markets

Come to the wonderful world of collective intelligence, wisdom of crowds, and prediction markets!&#8230- The sun shines bright, the market-generated predictions are vastly superior to the polls as election predictors, and the track record of the public prediction markets stretches as far as the eye can see. There are opportunities aplenty in the field of prediction markets, and the trading technology is cheap. Every working enterprise can have its own internal prediction exchange, and inside every exchange, a set of enterprise prediction markets that correctly predicts the future of business, which their happy, all-American CEO listens to. Life is good in the magic world of prediction markets&#8230- it&#8217-s paradise on Earth.

Ha! ha! ha! ha!&#8230- That&#8217-s what they tell you, anyway&#8230- &#8212-because they are selling an image (just as Bernie Madoff did). They are selling it thru their vendor websites, vendor conferences, vendor-inspired articles in blogs, newspapers and magazines, and interviews of vendor data-fed professors in the media.

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&#8217-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.

A prediction market is a market for a contract that yields payments based on the outcome of a partially uncertain future event, such as an election. A contract pays \$100 only if candidate X wins the election, and \$0 otherwise. When the market price of an X contract is \$60, the prediction market believes that candidate X has a 60% chance of winning the election. The price of this event derivative represents the imputed perceived likelihood of the partially uncertain future outcome (i.e., its aggregated expected probability). A 60% probability means that, in a series of events each with a 60% probability, the favored outcome is expected to occur 60 times out of 100, and the unfavored outcome is expected to occur 40 times out of 100.

Each prediction exchange organizes its own set of real-money and/or play-money markets, using either a CDA or a MSR mechanism &#8212-with or without an automated market maker.

Prediction markets enable us to attain collective intelligence. Prediction markets produce dynamic, objective probabilistic predictions on the outcomes of future events by aggregating disparate pieces of information that the traders bring when they agree on prices. The event derivative traders are informed by the primary indicators (i.e., the primary sources of information), like the polls, for instance. These informed speculators then execute their transactions based on their anticipations about the future &#8212-anticipations that will be either confirmed or infirmed.

The value of a set of prediction markets consists in the added accuracy that these prediction markets provide relative to the other meta predictive mechanisms, times the value of accuracy in improved decisions, minus the cost of maintaining these prediction markets, relative to the cost of the other meta predictive mechanisms. A highly accurate set of prediction markets has little value if some other meta predictive mechanism(s) can provide similar accuracy at a lower cost, or if very few substantial decisions are influenced by accurate predictions on its topic.

PS: I am updating a bit the content of this webpage, over time &#8212-so as to finesse the message.

# Obstacles to Prediction Market Adoption

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. […]

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.

# Definition of Collective Intelligence

Collective intelligence is intelligence that emerges from the collaboration and competition of many individuals.

Anybody has a better defintion?

I need one for the mission statement of the Open Institute I am writing up right now.

# Collective Intelligence – Prediction Markets – NewsFutures

Emile Servan-Schreiber of NewsFutures

1/2

PART 1: EVIDENCE OF PREDICTION MARKET ACCURACY

2/2

PART 2: WHY PREDICTION MARKETS ARE ACCURATE

Q&amp-A1

Q&#038-A 1: Aren’t political prediction markets just following the polls?

Q&amp-A2

Q&#038-A 2: Why did prediction markets fail to predict the lack of weapons of mass destruction in Irak?

Q&amp-A3

Q&#038-A 3: Would market predictions still be accurate if everyone believed them?

Q&amp-A4

Q&#038-A 4: Is Democracy ready for prediction markets?

Q&amp-A5

# Are prediction markets useful to you?

It&#8217-s &#8220-pretty clear&#8221- that the prediction markets on political elections aggregate information from the polls &#8212-and from the political experts.

Previously: #1 – #2 – #3 – #4 – #5 – #6

It&#8217-s &#8220-pretty clear&#8221- that:

1. InTrade has been over-selling the predicting power of its prediction markets.
2. The prediction markets are information aggregation systems &#8212-not magical tools.
3. The main benefit of a prediction market is to express an aggregated expected probability. Most of the times, this is of low utility.
4. In complicated situations, this aggregation will contrast well with a poor reporting. In these instances, the prediction market is a useful source of information.

# Are collective intelligence solutions being oversold?

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 = The wisdom of crowds comes to the enterprise.

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).

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.

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.

My remark about the Forester report:

– It&#8217-s a very good document.

APPENDIX #1: Prediction Markets – DRM Review

APPENDIX #2:

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

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)

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

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

HedgeStreet – (CDA) – (not licensed)

BetFair – (CDA) – (not licensed)

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

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

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.)

• 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

• 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

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-