Monday, June 30, 2008

Important fact #1: These things work

Although fun and simple to use, there is one thing to know about prediction markets:

They work. Really, really well.

Prediction markets have been around for about twenty years, primarily in the US, long enough to build an impressive record in Presidential elections, as the following table shows.

A similarly impressive record in predicting elections is emerging from US companies which have in the last four years adopted prediction markets in large numbers.
  • Market beat official forecast 6/8 (Plott ‘00)
  • Eli Lily markets beat official 6/9 (Servan-Schreiber ’05)
  • Microsoft project markets beat managers (Proebsting ’05)
Here in New Zealand, a major company we are working with has seen their average forecasting error halve in the six months they have been using wisdom of crowds technology.

Six months ago when we started our pilot with them, they didn't want their name mentioned for fear of their market being seen as a game.

Now they won't let us mention their name for fear of ceding a competitive advantage!

If there is one thing about prediction markets to take away, it is that they really do deliver extraordinary insight.