Prediction Markets

From PuneTech

A prediction market is like a stock market, except that instead of buying or selling stocks in a company, you are buying or selling "stocks" in a prediction. The prediction can be something like "India will win more than 3 gold medals at the 2008 Olympics". At the end of the 2008 Olympics, if India actually wins 3 or more medals, each stock will pay out a dividend of 100 units. Otherwise, you get 0 units. After this point, this particular stock ceases to exist.

However, before the 2008 Olympics, nobody knows for sure whether India will win 3 medals or not. Hence, it is not clear whether the price of the stock will be 100 units or 0 units. Somebody who thinks that the probability of the prediction coming true is about 30%, should be willing to pay about 30 units for each stock. Someone else who thinks that the probability is 60% should be willing to pay 60 units for each stock. And the guy who bought at 30 units should be happy to sell it to the guy who is willing to pay 60.

As new information becomes available, the price goes up or down. If Anju Bobby George gets injured, the probability of winning 3 medals goes down and the stock will fall. If KPS Gill is removed as IHF chief, the stock will probably go up.

Prediction Markets startup, LordsOfOdds, has a really nice, detailed example if you want to understand it better.

[edit] Why bother?

At the very least, the game can be a lot of fun once you get hooked.

But there is more. Prediction markets are actually useful to get an idea of what the crowd thinks of the probability of success of any prediction. (The current stock price of the prediction directly gives the predicted success percentage.) Combine this with research that says that the average wisdom of the crowds is as good as that of highly-paid experts, and you can suddenly see how a prediction market is a great tool for getting "expert opinion" on any topic.

This has been found to be rather useful in the context of large corporations. Anybody who has worked in one, can attest to the fact that communication and information flow are rather pathetic and nobody really has an idea of what is going on. Enter prediction markets. They actually become sneaky way of getting information out of the employees while they think they are playing a fun game.

HP started using prediction markets internally in sales forecasting. Now they use prediction markets in several business units. Intel uses them in relation to manufacturing capacity. Google uses them to forecast product launch dates, new office openings, and many other things of strategic importance to Google. Microsoft uses it to predict number of bugs in a software package. GE uses it to generate new product ideas from employees. (Sources: [1], [2])

[edit] Local Companies Using this Technology

• LordsOfOdds - Provides a prediction market service/game portal
• Symantec - Uses prediction markets internally