Putting Prediction Markets to Work

Ann All

One of the most interesting stories I've written in the last nine months or so (at least in my opinion) was about prediction markets, Web-based applications modeled on stock markets that allow employees to invest in "stock" representing future events or outcomes, such as whether a new product will be delivered on time. Bo Cowgill, a quantitative marketing manager at Google, told me about his company's prediction market program. Several other large companies declined to speak with me, saying they didn't feel their markets were mature enough yet but hinting they were proving pretty successful.


Cowgill said the markets were more reliable than traditional forecasting methods because of the "diversity of cognitive styles" incorporated in the markets by including large groups of employees.in the mix. He said:


With more traditional methods, you rely on a single analyst, or maybe a team of them, crunching numbers. They are typically not going to be as exposed to as much information as the crowd.


A similar opinion is echoed in a YouTube clip featuring a bunch of Best Buy employees discussing the retailer's prediction market. The clip is contained in a post on the Enovation Matters blog. One of the employees says that if the value of a stock concerning the delivery time of a project he is managing experiences a sudden drop, he knows he needs to investigate. Early warning signals can help get projects back on track, he implies.


Markets make it easier for employees to share information they might not feel comfortable sharing in more traditional forums such as meetings, a point made both in my story and in the video. As one Best Buy employee points out, businesses are a lot like Communist countries. Such countries collapsed not because their leaders were stupid, but because no one wanted to tell the leaders anything that conflicted with the official party line.


Despite their apparent advantages, the blogger notes that few companies appear to be using prediction markets, with Google, Eli Lilly, HP and Best Buy some of the most notable exceptions. The blogger spoke with some companies that experimented with prediction markets but didn't adopt them. Their reasons for rejecting the markets were largely cultural, not a surprise since one of my story sources, Inkling CEO Adam Siegel, told me:


Certain levels of a company don't like (transparency of prediction markets) because traditionally they've been able to control and spin information. Senior-level people love it because they are always complaining they don't get good insight into information, and lower levels love it because they are being allowed to participate. It's that middle management layer that sometimes gets caught in the crossfire.


An executive of a global B2B company told the Enovation Matters blogger that while the markets were mostly more accurate than other forecasting tools, "since the forecast(s) were generated collectively, no one wanted to take responsibility of that forecast." Another executive said the forecasting division saw the markets as a threat to their job and thus "created noise in the system" to abandon them. Another executive said participation in the markets was low.


Getting employees to participate doesn't appear to have been a problem for Best Buy, judging by comments on the video. Several employees mention the importance of having a more direct "voice" in the company. "Everyone wants to participate to make information better and more accurate," says one worker. Another says the markets help "make it exciting to get out of bed and come to work."


Prediction markets are certainly worth a try, Forrester Research analyst G. Oliver Young told me, thanks to their low cost and ease of deployment.


The larger the number of participants, the more effective markets will be, my story sources agreed. Among their suggestions for enlisting participants:


  • Communicate upfront about how the markets work. Explain why your organization is creating markets and what it will do with the information it gathers.
  • Enlist an executive-level sponsor to lend credibility to markets. "Cheerleading from the top helps a lot," said Cowgill.
  • Consider starting a blog so folks can write about interesting trends in the market, which will help maintain interest and participation levels. "That shows folks the markets are being monitored and the company is listening," said Siegel.
  • Create an element of competition by pitting departments against each other. This gets a vote of confidence from a Best Buy worker, who says in the video that it's fun to see how your portfolios perform against peers.
  • Consider offering both "hard" rewards such as gift certificates and "soft" rewards such as inviting top traders to attend special meetings. While Google offers some cash rewards to its top traders, "people are more pumped up about the t-shirts than anything else, that and seeing their name appear on the leader boards," said Cowgill.
  • Consider also offering markets on non-business topics of interest, such as gas prices or elections. At Google, there was a positive correlation in trading volumes of "just for fun" and more business-oriented markets, suggesting that offering both would improve liquidity.

    Add Comment      Leave a comment on this blog post
    Jul 6, 2009 1:24 AM David Reinke David Reinke  says:

    Great post.  However, I think the crowdsourcing movement needs to move beyond the stock market analogy to fully resonate and grow into a mainstream forecasting tool. 

    The people who have the intelligence we seek inside companies don't have interest in 'playing the market' nor the ability to easily translate their opinions into predicted stock price movements. 

    As a nascent industry we can accelerate adoption by taking the best of predictive markets and combining it with a lightweight online gaming experience that collects intelligence through a simple, fun interface.


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