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Ben Kunz just published a BusinessWeek article with several interesting insights about how the Dow Jones industrial average signaled the recent market turmoil - very much like how a prediction market aggregates intelligence about future events.
How did Wall Street know what would happen? It acted like a prediction market, a pool of intelligence that can foresee the future. Prediction markets are simply bets on ideas: What do you think something is worth, and more important, what will it be worth tomorrow? When groups of people bet on something, their combined intelligence is often remarkably prescient.
As you may know, this is something that James Surowiecki discusses extensively in his book, The Wisdom of Crowds. Ben also talked with Robin Hanson about why the traditional prediction methodologies fail:
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.
(Ben Kunz is director of strategic planning at Mediassociates, a media planning and internet strategy firm. He is author of the advertising strategy blog.)
