Does anyone in your organization listen to the opinions of employees below the middle-management level? Are those employees willing to offer opinions? For many organizations, the answer is no, on at least one count, if not both.
Gaining insight from heretofore-untapped internal resources is one of the ideas behind prediction markets, enterprise betting pools modeled on stock markets. Like those markets, the idea is that a broad pool of speculators generates more reliable results than a smaller group of experts. Employees are typically asked to invest in such questions as whether a product will be delivered on time or whether the company will meet its sales goals for the quarter.
How accurate are they? The Hollywood Stock Exchange, a virtual market game established in 1996 in which players buy and sell prediction shares of movies, actors, directors and other film-related options, correctly predicted 32 of 2006's 39 marquee category Oscar nominees and seven out of eight top category winners.
Among the companies experimenting with prediction markets are Cisco Systems, Procter & Gamble and General Mills. Google has been doing so for more than three years.
Bo Cowgill, Google's quantitative marketing manager, says the company has 25-30 markets running at any given time. In Google’s markets, as in many other corporate prediction markets, participants begin with an endowment of artificial currency, which they can use to “purchase” pseudo-securities. At Google, the currency is called “Goobles.” Participants earn more currency with successful predictions.
Markets reflect a consensus probability that events will occur. To determine accuracy of markets, Google looks at the connection between prices of events and the frequency with which they actually occur. If prices are correct, events priced at 10 cents should occur about 10 percent of the time.
At Google, the markets are accessed via the company’s intranet. There, Googlers can make trades, view results in real time, and register to be notified when markets close.
Cowgill says these markets produce more effective predictions because they incorporate the wisdom of the crowd, a Web 2.0 principle popularized by James Surowiecki in his 2004 book, “The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations.”
“The diversity of cognitive styles you can incorporate in the market is a lot higher than you could with the traditional research approach. 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,” says Cowgill.
As in the broader financial markets, prediction markets work because the most informed traders tend to make the biggest bets, says Forrester Research analyst G. Oliver Young. “If you are certain you know what outcome is going to be, you’re going to put every dollar you’ve got on that outcome.”
Seeking opinions from a diverse group of employees rather than just the usual decision-makers helps organizations mitigate risk, says Adam Siegel, co-founder and CEO of Inkling, Inc., a provider of prediction market software. “You want as much information as possible upfront so you can react to possible problems,” he says.
Siegel reads the 10K statements of potential clients to help identify their hot-button issues. When they express interest in the markets but wonder what kinds of questions to pose, he suggests establishing markets examining risk factors such as how pricing fluctuations affect the market for a company’s products or how acquisitions may impact the competitive landscape.
A drawback of prediction markets is that they won’t reveal the factors behind the bets. But, says Young, “If a red flag is raised about a particular issue, it’s not hard to go back and investigate” to determine the root causes of problems. “The bigger problem for most companies is they just don’t know what’s going to happen, and the red flag never goes up.”
There is value even if results are not on target, says Siegel. “Even if the markets are wrong, understanding your employees’ perceptions will lead you to ask more questions, to find out why the information wasn’t there so they could get a question right.”
Cowgill says data yielded by markets can also help companies better understand their organizations and their reactions to internal and external market forces. Google discovered, for example, that its newly hired employees are among the most optimistic in their predictions and that optimism is more evident when Google’s stock is appreciating.
Some organizations choose to involve suppliers or other outside partners in their markets. Siegel offers the example of a bank that set up two markets, one just for internal employees and another that also included its vendors. “They felt that who better to respond to questions than someone trying to sell to them, because (the vendors) knew their business quite well.”
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