Prediction Markets: Collective Intelligence @ Work
Prediction Markets
Collective Intelligence @ Work
Emile Servan-Schreiber, PhD
NewsFutures
© newsfutures
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Prediction Markets: Collective Intelligence @ Work
Example Prediction Market
Barack Obama to win the
Democratic Nomination
Source: NewsFutures – March 25, 2008
Stock Payoff = $1 if event happens, nothing otherwise
Stock Price = estimated probability of event
© newsfutures
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Prediction Markets: Collective Intelligence @ Work
Example Prediction Market
Barack Obama to win the
Democratic Nomination
Source: NewsFutures – March 25, 2008
Chances
are 81%
Stock Payoff = $1 if event happens, nothing otherwise
Stock Price = estimated probability of event
© newsfutures
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Prediction Markets: Collective Intelligence @ Work
Price Prediction Validity: Sports
Predictions
 210 football games
Participants
 2000+ sports fans
 Self-selected
Trading Period
 Before the games
Source: Servan-Schreiber, et al (2004) – Electronic Markets
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Prediction Markets: Collective Intelligence @ Work
Price Prediction Validity: Business
Predictions
 150 events
 40 subject areas
Participants
 1,500 employees
 Self-selected
Trading Period
 Various
Source: Google
© newsfutures
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Prediction Markets: Collective Intelligence @ Work
Price Prediction Validity: Politics
Predictions
 50 Elections
 239 Candidates
Participants
 Hundreds of
political observers
 Self-selected
Trading Period
 Months until
election day
Source: Iowa Electronic Market
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Prediction Markets: Collective Intelligence @ Work
Prediction Markets Outperform
o
Individual Experts
» Bias
» No diversity
o
Opinion Polls
» No reward for expertise
» No penalty for fools
o
Official Company Forecasts
» Politics
» Conformity
» Brittle models focused on past
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Prediction Markets: Collective Intelligence @ Work
Why does it work?
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Prediction Markets: Collective Intelligence @ Work
The Power of Diversity
o
o
o
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Why does it work?
Everyone contributes biased knowledge;
Knowledge adds up;
Biases cancel each other.
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Prediction Markets: Collective Intelligence @ Work
The Power of Diversity
o
o
o
Why does it work?
Everyone contributes biased knowledge;
Knowledge adds up;
Biases cancel each other.
Rewarding timely and truthful revelation
of information
o
It’s not enough to be right;
You must be right before others.
o
Encouraging contrarian opinions.
o
© newsfutures
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Prediction Markets: Collective Intelligence @ Work
The Power of Diversity
o
o
o
Everyone contributes biased knowledge;
Knowledge adds up;
Biases cancel each other.
Rewarding timely and truthful revelation
of information
Why does it work?
« A true Englishman doesn’t joke when he
is talking about so serious a thing as a
wager. » – Phileas Fogg
Using more brain power
o
o
It’s not enough to be right;
You must be right before others.
o
Encouraging contrarian opinions.
o
© newsfutures
o
Betting calls on specific risk/reward areas
Putting the brain in a diffent state
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Prediction Markets: Collective Intelligence @ Work
The Power of Diversity
o
o
o
Everyone contributes biased knowledge;
Knowledge adds up;
Biases cancel each other.
Rewarding timely and truthful revelation
of information
Why does it work?
« A true Englishman doesn’t joke when he
is talking about so serious a thing as a
wager. » – Phileas Fogg
Using more brain power
o
o
It’s not enough to be right;
You must be right before others.
o
Encouraging contrarian opinions.
o
o
Betting calls on specific risk/reward areas
Putting the brain in a diffent state
« A true Englishman doesn’t joke when he is
talking about so serious a thing as a wager. »
-- Phileas Fogg :: Around the World in 80 days
© newsfutures
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Prediction Markets: Collective Intelligence @ Work
«The most heeded futurists these days are not individuals, but
prediction markets, where the informed guesswork of many is consolidated
into hard probability.»
“Guide to Prediction Market”
“You Can Bet on Idea Markets”
“Co-creating an organization future”
“Smarter than the CEO”
“How to decide? Create a market!”
“The End of Management”
“The Future Divined by the Crowd”
“All seeing, all knowing”
“Workers, Place Your Bets”
“The Future of Futurology”
“Betting to Improve the Odds”
“Wisdom of the Crowd”
“A new business research tool”
“Market Magic”
© newsfutures
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Prediction Markets: Collective Intelligence @ Work
More and more leading companies
are recognizing the value
of prediction markets
2000
© newsfutures
2001
2002
2003
2004
2005
2006
2007
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Prediction Markets: Collective Intelligence @ Work
Main Business Applications
Forecasting Sales
Selecting New Ideas
Measuring Risks
Monitoring Project Delivery
Decision Markets
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Prediction Markets: Collective Intelligence @ Work
Take Aways
• Prediction markets aggregate the insights of many.
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Prediction Markets: Collective Intelligence @ Work
Take Aways
• Prediction markets aggregate the insights of many.
• Prediction markets beat the alternatives.
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Prediction Markets: Collective Intelligence @ Work
Take Aways
• Prediction markets aggregate the insights of many.
• Prediction markets beat the alternatives.
• Prediction markets are increasingly used by business and government
decision makers.
© newsfutures
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Prediction Markets: Collective Intelligence @ Work
The End
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Prediction Markets: Collective Intelligence @ Work
Why do people participate?
RR
RR
© newsfutures
Rewards : prizes, cash, …
Recognition : by bosses and peers
Relevance : interest, job fit
Relationships : interactions, community
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