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Prediction markets are a technique used to predict the likelihood of outcomes using values tied to events. So far they've proven to be at least as accurate as other predictive approaches, and significantly more engaging.
A popular example is the Hollywood Stock Exchange which allows individuals using virtual money to buy and sell shares in movie stars and movies, thereby reflecting whether their star is rising or falling. This market correctly predicted 32 of 39 big-category Oscar nominees and 7 of 8 top category winners in 2006 (reported by Wikipedia).
A serious corporate decision making tool?
Prediction markets are now beginning to be considered as a serious tool for corporate decision making, with Zdnet reporting in Predictive markets: Can they work for the enterprise? that Best Buys, Corning, Google and other organisations are now using the approach to support other predictive techniques.
General Electric, France Telecom, Microsoft, Hewlett-Packard, Renault, Eli Lilly, Pfizer, Siemens, Masterfoods, Arcelor Mittal, Starwood and other organisations also use prediction markets.
Other uses for prediction markets
The technique is also useful in usability design - give focus group participants a certain number of dollars to spend on features and observe how they prioritise relative value.
Given that prediction markets can utilise web technologies to reach much broader audiences than is cost-effective for market research and focus groups, these markets are a viable technique for governments seeking another perspective on what is most important to their constituents.
Prediction markets in government
The Singaporean government's Agency for Science, Technology and Research has already used a prediction market to forecast long term social and technology trends.
Government Futures is using a market to predict social and economic trends in the US.
This approach could also be applied to help legislators determine the details of government policy, the types of initiatives that should be undertaken by government agencies in support of policies and even how they should be communicated to citizens.
In fact a US Economics Professor, Robin Hanson, has outlined a form of government that operates on the basis of prediction markets, termed a Futarchy, in the paper Shall we vote on value, but bet on benefits? (PDF). In a nutshell he suggests that,
To make use of speculative markets, we can “vote on values, but bet on beliefs.” We now use democracy both to decide what we want, and to decide how to get what we want. We might instead still have democracy say want we want, but let speculative markets say how to get what we want.
That is, elected representatives might define a formal measure of “national welfare”
(analogous to GDP) and manage its measurement after the fact. Market speculators would then say which proposed policies they expected to raise national welfare as so defined.
The basic rule of government would then Publish Postbe this: when speculative markets clearly estimate that a proposed policy would increase expected national welfare, that policy becomes law.
As yet I am unaware of any use of prediction market techniques within Australian government, however given their use in the corporate world and by at least one other government, I can see utility for the approach alongside other forecasting techniques.
If anyone is aware of the use of prediction markets in Australian government, drop me a line.
