twopointouch

As I’ve observed before, marshalling collective intelligence, or the wisdom of crowds, on the Internet isn’t always very easy. Social news voting sites like digg are susceptible to social influences. Wikis are also weakened by this: do you really want to edit what your boss says? One way, though, to generate the necessary conditions (independence, self-interest, diversity) is to set up a virtual stock market.

In 2003, for example, the Pentagon set up a prediction market for world events including terrorist activity, FutureMAP. It was rapidly closed down again when the press discovered this “People Betting on Terrorism Outrage!!!” However, as Time magazine reported last year, this wasn’t a clever move:

…the fact is, betting on terrorism actually makes sense. Consider the investigation just launched in Washington over an apparent leak at the Department of Homeland Security in which insiders seem to have tipped off relatives about an alleged threat to the New York City subway system. Outrageous behavior? Perhaps. But get those “insider traders” into a market, and everyone will have access to that information. Insiders have a motivation – money, at the basest level – to distribute their knowledge.

The Hollywood Stock Exchange (HSX.com) uses pretend money to buy and sell the “stocks” of movies and stars. The predictions made by the exchange are so accurate that the company sells its valuations and opening weekend predictions to film production studios. Popex (now defunct) did the same for the fortunes of pop acts. The Iowa Electronic Market’s election predictions have outperformed major national polls, even months ahead of the election. The IEM’s predictions have been out by just 1.37% in presidential elections, 3.43% in other US elections, and 2.12% in foreign elections. This is despite the fact that members of the Exchange have mainly been men (viz. not women) from Iowa, and so not representative of the voting public.

So, interesting to hear about the launch of Inkling on Techcrunch. Basically, it’s a site for betting on future events in a stock-market simulation using pretend money, inkies. More innovatively, the service offers Enterprise and Small Business versions of the service. The idea is that businesses create stock exchanges within their companies to facilitate decision-making. Google, Eli-Lilly and Microsoft already use prediction markets internally for this purpose.

You might set up a market for example, on which of your four products are going to be best-sellers. You open that up to as many people as you like – arguably your whole company, or even your customer base. The market should involve real rewards for correct answers. This would be the best approach because you need people to care about the answers they give. Because you are getting varied, independent, self-interested perspectives, the answer given by the market is likely to reveal the truth.

This is better than a poll, because (a) it blends different answers to set a price for the likelihood of various alternatives and (b) it gives people a reason to use their best intelligence, intuition and insider knowledge because there’s a reward for them at the end for betting on what they really think will happen.

In a technology company for example, the sales people probably know your customers best, but the engineers know the real capabilities and limitations of the product. Marketing, on the other hand, has an idea on what people like and what attracts press coverage. The secretary may have a bit of insider knowledge. The cleaner may not know technology, but he knows what sounds good. Combine all those perspectives in the correct way and you end up with a far more complete picture than other methods are likely to achieve.

From the FAQ:

What is a Prediction Market?

Prediction markets allow a group of people to express an opinion over a period of time about the probability of an event occurring. A question is posed and people buy and sell shares in stocks representing possible answers to that question. The highest priced stock at the end of a period of time is the group’s prediction.

Prediction markets are not only useful at forecasting the future, they also provide invaluable insight in to the perception of a group of people, information that can be just as valuable as input to an upcoming decision or action as an accurate forecast.

Inkling is not the first prediction market, but we believe it sets the standard for ease of use and setup, thus capturing the true ethos of what prediction markets are all about: wide participation of a diverse group of people to collectively state an opinion.

Interesting news for digg: