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How Prediction Markets Forecast Consumer Behaviors (Forrester)
How Scalable Securities Markets Identify Winning Product Concepts & Attributes (Journal of Product and Innovation Management)
Prediction Markets (Journal of Economic Perspectives)
Predicting the Success or Failure of a New Product Concept (Strategyn)
Prediction Markets: A Practitioner’s Guide (Expert Series)
Prediction Markets: Value Among the Crowd (Financial Times)
Prediction Markets: An Extended Literature Review
What Is a Prediction Market?
Most people think of a market as providing a platform for the exchange, through trading, of something of value — a good or a service. This is indeed the primary function of markets at the industry level. A prediction market is based on a market mechanism and is an efficient way to aggregate opinions about value of what investments an organization should make or whether an outcome will happen in the future. Additional benefits of prediction markets are improved decision-making and improved employee morale.
Prediction markets are an effective way to eliminate a bias in information through tapping diverse minds. According to our Chief Scientist Robin Hanson, “The trouble with humans, it seems, is that even when we’re smart, we have access to imperfect information and follow the groupthink of our peers. Because we often disagree with other groups, we band together and end up agreeing too much with our own teams. No single leader can overcome such biases and data gaps to predict with certainty whether an action will succeed or fail. But Hanson suggests markets can do just that.”
Prediction markets forecast trends that are, on average based on experience, more accurate than those produced from traditional forecasting approaches, largely because markets incorporate more information, run continuously, and aggregate employees’ opinions in an anonymous way. With the prediction market functioning continuously, markets will disclose the impacts of new information far faster than any alternative approach. Because the common disincentives for employees to reveal bad news to managers have been eliminated in a prediction market, this system gathers opinions from minds that are sometimes silent. In some instances, a prediction market can serve as an effective early business indicator for leaders— by providing signals that a variance of say 10% related to a critical business initiative has been indicated by the market, allowing business leaders to assess and potentially take action.
The Value of a Prediction Markets
Prediction markets offer a unique ability to incorporate information-aggregation and the predictive power of markets within traditional corporate structures. A prediction market is established within the company to generate predictions on issues of interest in a manner that directly addresses the foundational communication constraints. Incorporating this type of approach in a geographically distributed and virtually managed organization can provide significant benefits by promoting a smart forum with a goal to drive final analysis of influence and intelligence in a particular area. Additionally, a collaborative approach can increase employee engagement, raise energy levels and offer a unified platform for employees to be heard, while leveraging the ability for leaders to receive input from all minds in the company.
How Prediction Markets Work
A prediction market works similarly to a stock exchange. A “stock” is defined to reflect an issue of interest to your organization such as the product’s readiness to launch, forecast sales trends of the company’s products, viable new products or services, and other in-depth insights of employees. These dynamic insights from your employees can be identified by geographic region, business unit or through other demographics.
Your organization’s employees will participate as traders on the basis of their perceived understanding of future changes and prospects. With the protection of anonymity (eliminating the fear of reprisals for offering unpopular opinions) and a well-defined incentive structure, employees are motivated to acquire relevant information and contribute their best assessments. Traders buy and sell shares of the stock based on beliefs about future occurrences and their desire to increase the value of their portfolio. When an employee, for example, observes that the price of the stock is less (or more) than his/her expectation related to the topic, he/she will buy (or sell) the stock, thereby driving its price up (or down).
As a result of this dynamic, the prediction market stock price serves as an ongoing real-time trend forecasts of future results associated with the question being asked. It also continuously reflects traders’ aggregated assessment of future results in the same way that the trading of a company’s stock on a stock exchange continuously reflects the trading community’s collective assessment of the market value of the company.
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