April 24, 2008

Experts beware: The Prediction Markets are coming

If you never heard about Prediction Markets before don’t worry, you are not alone. Most of us did not know anything about it until recently, not even people like me who think to be up-to-date with what happens in the cyberspace. Prediction markets is an spin-off of the Collective Wisdom hypothesis, scientifically tested for the first time by the Victorian academic, polymath and statistician Sir Francis Galton and popularized in the book of James Surowiecki The Wisdom of Crowds. Prediction markets are methods based on social media functionality and applied by corporate strategists to improve the accuracy of predictions regarding the outcomes of financial, strategic or commercial decisions by tapping and averaging the collective intelligence of employees. In simple terms you can ask your employees (and even your customers or everyone for that matter) to bet about the success of your new product or the impact of the new advertising campaign. Experience so far seems to support the hypothesis, predictions of this kind are more accurate than those of experts!
The issue has become interesting enough for the New York Times to pay attention to it and for McKinsey to organize a roundtable with a number of insiders.
Web sites apply the principle in larger scale asking people to predict the news, the chance of success of Hollywood films or of new video games (see NYT above). Interesting, isn’t it?