Prediction Market Forecasts Are Not A Sure Thing

The February 26 Economist looks at the state of prediction markets, a tool for turning collective human insights into forecasts. The title and subhead capture the reporter's take: "An Uncertain Future," "A novel way of generating forecasts has yet to take off."

Prediction markets rely on broad participation to generate likelihood profiles for a variety of foreseeable outcomes. The short, anecdotal Economist article, by contrast, cites only one trading-platform provider and experiences at three user organizations. Those experiences are nonetheless telling. "Koch Industries, an American conglomerate in a range of businesses including chemicals,... says the results so far have been pretty accurate compared to actual outcomes, but stresses that markets are complementary to other forecasting techniques, not a substitute for them." On the down side, a couple of banks found that "a big hurdle facing managers using prediction markets is getting enough people to keep trading after the novelty has worn off" and "another reason prediction markets flop is that employees cannot see how the results are used, so they lose interest."Prediction markets are a form of serious game, one I've looked at before, different however from the games I looked at in my recent article, "For Serious Business Training, Nothing Beats Computer Games." The user doesn't participate in a scripted, immersive experience. The user doesn't explore scenarios or interact with avatars, whether other human players or bots.

Prediction markets as betting games are inherently collaborative, albeit in determining the parameters rather than in the sense of working with others to learn or to bring about a predetermined or mutually beneficial outcome. Playing is like going to the horse track, where odds and pay-off depend on wagers placed by other bettors and there may be multiple winners. Unlike poker, fizzbin, or other adversarial games, the bettor is not part of the action. These gambling analogies perhaps explain the Economist article's observations about prediction-market participation: players who don't have a piece of the action or a seat at the table may lose interest in the game.

Slow corporate uptake reported in the Economist article -- "even fervent advocates admit much remains to be done to convince skeptical managers of their value" -- is supported by a bit of analysis I gathered for my serious-games article. An Apply Group study tallied that 66% of corporate respondents to a 2007 survey foresaw broad-market adoption of learning games by 2012, but lead author Martine Parry reported to me, "perception of games not being appropriate in a business context" is far and away the greatest threat to adoption.

Beyond sustaining participation and corporate acceptance, add a third obstacle to uptake: That both the collective, crowd mind and the foresight of the small number of folks who run the show in most companies and government can be wrong, often woefully. Government decision-making is guided (but not determined) by a consensus-fueled political processes, and markets are shaped by a metaphorical "invisible hand" that collectivizes individual decisions, allowing for "cooperation without coercion." As shown by the worldwide economic situation, which was precipitated by bad bets on war and in major economic sectors (energy, housing, banking, automotive), sometimes we freely cooperate toward our own and others' disbenefit. When a gaping chasm opens between prediction-market thinking and rational, common sense, Watch Out.

Prediction markets remain a promising forecasting tool. I'm confident they will find wider use in the coming years, hopefully complementing other predictive approaches rather than supplanting them. Sometimes the collection of methods will support a particular outcome, and sometimes disagreement will raise red flags. In either case, prediction markets will deliver insight that shouldn't be ignored.The February 26 Economist looks at the state of prediction markets, a tool for turning collective human insights into forecasts. The title and subhead capture the reporter's take: "An Uncertain Future," "A novel way of generating forecasts has yet to take off." The short Economist article cites experiences at three user organizations. Those experiences are telling...