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Thursday
Feb262009

The future of corporate prediction markets

The Economist today discusses the "uncertain future" of prediction markets in corporate decision making. As the article states, "although they have spread beyond early-adopting companies in the technology industry, they have still not become mainstream management tools." A couple of challenges are raised:

  • Getting enough people to keep trading once the novelty wears off. While an important point (a prediction market, like all markets, can only thrive and reach equilibrium if there are enough players), a good incentivization structure (e.g., money, prizes) should both encourage participation and better results.
  • Keeping people interested if they can't see how the results are being used. If a company isn't planning on using the results of the prediction market to make real decisions, then why create it to begin with? Wells Fargo, for example, said that its most effective trials took place in areas where managers could "do something with their findings." This should be the standard, not the exception. Plenty of prediction markets out there now are simply fun and games, brag to the community ventures with no practical value (e.g., a current question on Hubdub: "Will Nadya Suleman's ex-boyfriend be confirmed as the father of her children?") Corporate markets run by businesses with a bottom line should have no tolerance for wasted time of their employees making silly bets. If the company is using the results, but it is just not clear to employees, then they have a simple strategic communication problem.
  • The wariness of bosses to rely on the recommendations of non-experts. This challenge seems to miss the point. Corporate prediction markets should be asking questions that the employees are experts in. Perhaps the junior staff does not have all of the program management knowledge of the managers who make the decisions, but they do have more insight into day-to-day operations. Gaining the collective judgment of employees who have windows into small pieces of the overall problem should, according to the Wisdom of Crowds argument, be worth more than any single expert.

The most successful corporate prediction markets ask specific questions that the employee pool can offer diverse, informed opinions upon. The Koch Industries example cited in the article, then seems to be a poor example. In Koch's prediction markets, employees can bet on the future prices of raw materials and the liklihood of bank nationalization. The truth is that an internal Koch market is probably not the best place to answer these big questions. There is no reason to believe that the collective wisdom of the chemical conglomerate on the future of banks should be better than the judgement of economic experts.

HP, by contrast, had great success focusing on something that their employees did have unique insight into: projecting future sales of printers. Their internal market is quite complex: “We want to reduce the wisdom of crowds to the wisdom of 12 or 13 people,” said Bernardo A. Huberman, director of the social computing lab at Hewlett-Packard. Among the techniques, he said, are preliminary tests to assess the “behavioral risk characteristics” of participants to shade predictions from people who are inherently risk seekers or risk averse.

Google has created the largest corporate prediction market in the world. Google economic analyst Bo Cowgill explains that the trading system lets Google management discover its employees' uncensored opinions: "If you let people bet on things anonymously, they will tell you what they really believe because they have money at stake," Cowgill said. "This is a conversation that’s happening without politics. Nobody knows who each other is, and nobody has any incentive to kiss up." Traders can bet on such questions as: Will a project be finished on time? How many users will Gmail have? (In addition to some unrelated, political questions).

The primary benefit of a prediction market is that it allows information to be shared efficiently and at little cost. Improved information in turn leads to better decision making by management. The important thing is to ask the right questions.

For more on the subject of corporate prediction markets, see Robin Hanson and Tyler Cowen.

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