You probably could use help making decisions. If so, the markets may be the place to turn.

That’s the argument of some economists, who believe in the decision-making prowess of free markets — specifically, in so-called decision or prediction markets.

The best known markets — those for buying and selling stocks or bonds — also tap the collective knowledge of investors to forecast the future direction of interest rates or the economy. But decision markets are made expressly for forecasting. For instance, the Iowa Electronic Markets, which let players bet on political contests, have repeatedly bested opinion polls in predicting election results. Similarly, the Hollywood Stock Exchange, where participants wager on movie box-office returns and possible Oscar winners, boasts more than a half million regular players.

Now, several companies are using software that sets up decision markets. These markets tap the collective knowledge of an organization by letting employees bet on future events, such as forecasting sales or betting on the most promising new product.

Early Returns

It’s still too early to tell how effective such efforts will be, but early users say these markets work as well as or better than

traditional forecasting tools. “We believe the technology has a lot of potential,” says Christina LaComb, a computer scientist in General Electric Co.’s computational-intelligence lab in Niskayuna, N.Y., which last summer ran a test to see whether the markets could help brainstorm new project ideas.

Using software from Consensus Point of Nashville, Tenn., GE researchers created a market where participants could bet on what they thought would be the most feasible project.

With the market, anyone could float “stock” in a proposed project; lab members began with a fixed amount of money, and then could buy shares in their favorite. The price of projects, which began at $50, rose and fell based on demand, with prices capped at $99. At the end of three weeks, the project with the highest price was declared the winner, and the winning team received financing to develop its idea. (A GE spokesman says only that the idea had something to do with artificial intelligence.)

To understand why these markets work as well as they do, consider the usual alternatives companies have for aggregating this sort of knowledge: committee meetings, polling, reports or focus groups. Meetings are often dominated by the person with the best arguments or most forceful personality, not necessarily with the best information. Sales quotas, budgets or other factors can distort or deter the accurate sharing of information.

In contrast, in decision markets, prices reflect all the information players have — data, opinions or intuitions — about the likelihood of some future event. While each player may have very little information, collectively they have a great deal. By rewarding winners, markets give players the incentive not only to share the information they have (by placing their bets on the favored outcomes) but to make an extra effort to gather more data.

The markets also empower participants in ways that meetings or surveys can’t. That’s because companies can set it up so that a broad array of workers take part in the markets. “Guys on the shop floor think this is terrific because they get to talk to the CEO,” says Justin Wolfers, a Wharton School assistant professor of business and public policy who has studied decision markets. “CEOs like it because they get to talk to the guys on the shop floor.”

Adoption of the tools is expected to grow now that a few software vendors have begun to promote marketplace systems to corporate clients. Corning Inc. is running a pilot project with decision-market software from New York-based NewsFutures Inc., to see how markets might be used in forecasting the liquid-crystal display market. O’Reilly Media Inc., Sebastopol, Calif., is preparing a test to see how well decision markets can predict the optimal print run for its specialized software manuals, using a Web-based marketplace from a Chicago start-up, Inkling Inc.

Monthly Printer Sales

Hewlett-Packard Co. was one of the earliest companies to test decision markets for internal forecasting. In 1996, researchers at H-P Labs wanted to see whether the markets could better forecast monthly printer sales.

About 15 to 20 players from different parts of the company, including product marketing and finance, participated in the market. Each was given a portfolio of cash and securities — representing a range of total monthly printer sales — and then had the opportunity to buy and sell the different securities. Once the actual monthly sales figure was revealed, the security that contained the actual sales was declared the winner and holders were paid a set amount; the other securities paid out nothing.

In a test over the next three years, the markets beat official forecasts in six out of eight tries. Still, the markets were time-consuming for participants and, researchers found, not as efficient as they could be. So to improve their accuracy, researchers have streamlined the markets to reduce the amount of time it takes to play from several days to minutes. Since 2002, some of H-P’s business units have been testing the revised markets.

Using markets to predict the future “is a sound idea,” says Kay-Yut Chen, a scientist at H-P Labs. “The only question is what game we should use.”

Another possible use of decision markets is to help companies forecast a single event — for instance, whether a new drug will win regulatory approval. Such a market might work like this: The company sets up a market where players can buy two contracts — one that pays out, say $100, if the drug is approved and one that pays nothing if it isn’t. Then participants buy and sell the contracts based on what they believe will be the outcome. So if the “will be approved” contract is selling for $60, that represents the market’s forecast that there’s a 60% likelihood that the drug will be approved.

The market also can be used to forecast a range of possible outcomes, such as the projected demand for laptop computers. Here, players choose from among contracts that represent different sales ranges — under one million, one million to two million, and so on.

–Mr. Totty is a news editor for The Journal Report in San Francisco.  Write to Michael Totty at michael.totty@wsj.com.