Prediction Markets: Distilling Collective Wisdom

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Case Details:

Case Code : BSTR268
Case Length : 14 Pages
Period : 1988-2007
Pub Date : 2007
Teaching Note :Not Available
Organization : --
Industry : Miscellaneous
Countries : Worldwide

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Despite their growing acceptance, some analysts remained skeptical of prediction markets and their ability to predict future events. They believed that surveys were just as effective as, or even better than, prediction markets.

Robert S. Erikson, an economist at Columbia University, compared the accuracy of the Iowa Electronic Markets to that of public opinion polls during the 200 days leading up to the previous five presidential campaigns.

Though his research found that the IEM's predictions were almost always closer to the eventual election vote percentages, the polls fared better if they were adjusted for factors that participants usually miscalculated, such as the incumbent's early advantage. He concluded that polls, combined with the knowledge of an experienced pollster, could outperform prediction markets...

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Many analysts believed that prediction markets had the potential to be the "next big thing" in forecasting and that they would be used in a wide array of situations. Robin Hanson, a noted economist, went as far as to suggest the creation of a futarchy -a form of government that would use prediction markets to decide which policies would have the desired effects.

However, in spite of support for the concept, not many people outside the scientific community knew about prediction markets and how they operated. This to many, was a major challenge in establishing prediction markets. "The biggest obstacle [to the acceptance of prediction markets] is that most people don't know what a prediction market is," said Shiau.

Another potential roadblock to the more widespread use of prediction markets, especially in the corporate world, was that the people who controlled the decision-making process and/or were responsible for taking decisions in an organization, could prove unwilling to relinquish their control over information...


Exhibit I: Using Prediction Markets in Corporate Settings: Some Dos and Don'ts
Exhibit II: A Comparison of HP's Internal Corporate Forecasts and the Results from Prediction Market
Exhibit III: The 'Stock Value' of Some Movies and Stars at the Hollywood Stock Exchange
Exhibit IV: Price Graph of Democratic Presidential Hopefuls


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