Issue 5 October 2008
The relative anonymity afforded
by prediction markets means
that less welcome messages
are often voiced that may not
otherwise be heard.
Trading occurs over time driving the price up or down. internal prediction markets set up within the company
So unlike traditional forecasting exercises where to forecast a range of outcomes such as product launch
participants can only express their views once, in a dates and new office openings. Over a thousand staff
prediction market continuous buying and selling allows (Googlers) have participated in one or more of these
participants to express their views many times in markets, registering bids on 146 events, covering 43
response to new information different subjects.
Throughout the lifecycle of a market, information and
“A real prediction market (as opposed to an
estimates are synchronised to inform the decision
opinion survey) adds a powerful dimension by
making process
allowing not just one but many continuous bets
until the market closes. This creates a constant
Finally, the market closes at a predefined time and
feedback loop of updated information. The relative
accounts are settled with participants. Company
anonymity afforded by prediction markets means
currency can then typically be exchanged for prizes.
that less welcome messages are often voiced that
may not otherwise be heard
5
”.
The corPoraTe world
Todd Henderson, McKinsey
Prediction markets can deliver impressive prediction
accuracy. Major organisations like Google, Microsoft,
Hewlett Packard, General Electric, Pfizer and Yahoo have alTernaTIves
used this approach to tap into the collective knowledge The Google example highlights one of the major
of their staff, partners and customers to better inform advantages of prediction markets over alternatives such
management decision making. as surveys, opinion polls and ‘expert’ panels, all of which
record a ‘point-in-time’ snapshot view on the outcome of
One of Microsoft’s early attempts at running a market an event. Prediction markets are constantly updated as
was to assess the validity of a new schedule for an new information becomes available from existing traders
internal testing tool. The market accurately predicted and new participants.
the very low probability of making the release date
So how do companies encourage participation? Bo
Hewlett-Packard ran a series of prediction markets to Cowgill, who manages prediction markets at Google
forecast monthly and quarterly sales and profit targets. encourages staff participation with a mix of fun and
Research showed that these markets consistently serious issues. Speaking at a McKinsey Round Table
produced more reliable predictions than the official he says “about 20 percent of our markets are about
sales forecasts that management relied upon
3
fun things like who will win the World Series. The fun
markets tend to draw people in and make them familiar
Bo Cowgill on Google’s official Blog
4
talks about the with how to trade in a prediction market. That’s good, as
20 | Perspectives on the future
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