Tom Davenport has picked up on the question of prediction markets. He is looking for information on use and knowing Tom will do a good job of putting it together so if anyone can help, do! I have mixed thoughts on the subject. Part of that is cynicism about anything with that much hype, especially when the hype doesn’t seem to match up with conversations I have with people in the claimed successful user companies. One of the problems for me is that in a market everyone is aware of other people’s bets and the market therefore will tend to equilibrium. Prediction Markets are not examples of The Wisdom of Crowds whatever Surowiecki says. In fact he seems to contradict himself
His criteria for a crowd to be wise can be summarised as follows:
Now if we look at these we can see that a market satisfies 3&4, to a degree 1 but fails on 2. In a market you are aware of and respond to market movements, so ipso facto you are not making a decision in isolation. So I can’t see why he uses prediction markets in his book.
Of course this does not mean that markets have no utility. However there seems to be a bit of a Hawthorn effect in operation – the case studies seem to be of start ups but with no continuation. I could well be wrong here, but that is the impression I am getting. Markets are there as an way of handling trade, indirectly they may predict but it is not their primary purpose. However I think there are better ways of using crowd wisdom. Distributing part problems to lists of players, engaging social networks on the basis of engagement. Not everything has to be reduced to money surely?
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