Prediction market

From Academic Kids

Also known as information markets, decision markets, idea futures, and virtual markets.

A prediction market is a speculative (i.e., betting) market created for the purpose of making predictions. Assets are created whose final cash value is tied to a particular event (e.g., will the next US president be a Republican) or parameter (e.g., total sales next quarter). The current market prices can then be interpreted as predictions of the probability of the event or the expected value of the parameter.

People who buy low and sell high are rewarded for improving the market prediction, while those who buy high and sell low are punished for degrading the market prediction. Evidence so far suggests that prediction markets are at least as accurate as other institutions predicting the same events with a similar pool of participants.

Public examples include the Iowa Electronic Markets, NewsFutures and the Hollywood Stock Exchange. One of the oldest and most famous is the University of Iowa's Iowa Electronic Market. It has been predicting the results of American presidential elections since 1988 with greater accuracy than polling companies. The Hollywood Stock Exchange, a virtual market game in which players buy and sell prediction shares of movies, actors, directors, and film-related options, correctly predicted 35 of 2002's 40 big-category Oscar nominees.

In July 2003, the U.S. Department of Defense publicized a Policy Analysis Market and on their website speculated that additional topics for markets might include terrorist attacks. A critical backlash quickly denounced the program as a "terrorism futures market" and the Pentagon hastily cancelled the program.

Prediction markets were championed in James Surowiecki's 2004 book The Wisdom of Crowds.

Prediction markets are speculated to be useful decision support tools for corporations.

Commercial interest:

- Hewlett-Packard pioneered applications in sales forecasting and now uses prediction markets in several business units. Mentioned in academic publications from HP Labs. Also mentioned in Newsweek [1] (http://msnbc.msn.com/id/3087117/) (October 2004)

- Several companies, Common Knowledge Markets (http://www.commonknowledgemarkets.com/overview.html), Predicom, Incentive Markets, NewsFutures, and Net Exchange, are known to specialize in providing application development services to corporations.

- Eli Lilly mentioned in WIRED (June 2004) [2] (http://www.wired.com/wired/archive/12.06/view.html?pg=2) and TIME (July 2004) [3] (http://www.time.com/time/insidebiz/article/0,9171,1101040712-660965-1,00.html) as having run pilots in 2003.

- Siemens has experimented with scheduling applications. Mentioned in publications from Ortner, Univ of Wien.

- Intel mentioned in Harvard Business Review (April 2003) in relation to managing manufacturing capacity.

- Microsoft is piloting prediction markets in 2004.

- (Rumor) Ford is interested in piloting in 2005.


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