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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Introduction Contd...

Over the years, several other prediction markets have come into existence. The corporate world came to recognize the potential of prediction markets and large companies such as HP, Yahoo, Google, and Microsoft also set up prediction markets.

However, despite their growing popularity, prediction markets were criticized on several grounds. Others believed that prediction markets were susceptible to manipulation. Also, prediction markets faced some challenges.

Owing to government restrictions, members in these markets had to use virtual currencies, which according to some analysts, limited the accuracy of predictions.

According to them, in order to realize the full potential of prediction markets, members had to be allowed to wager real money, even if only small amounts.

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What is a Prediction Market?

A prediction market may be defined as a speculative market created for the specific purpose of making predictions. Prediction markets operate on the premise that if it is possible to gather a sufficiently large number of people who think and act independently and possess private information, then the group's predictive judgments and analyses, on the whole, will be more accurate than those of individuals, however intelligent these individuals may be.

A prediction market is similar to a stock market, in that, just as the stock market is an efficient way of determining the value of a company's stock, the prediction market is an efficient way of forecasting everything from sales of a particular product, to the results of presidential elections.

However, for prediction markets to work well there has to be an efficient system of pooling the information possessed by several people. Therefore, some people preferred to call prediction markets Information Aggregation Mechanisms (IAMs). Predictions made by prediction markets were likely to be accurate if the markets had three essential characteristics -diversity, independence, and decentralization...

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