Thinking Analytically

On the Freakonmics blog, Justin Wolfers discusses some of the progress made related to the adoption of prediction markets in the US. Like many innovative ideas, progress can be stalled through legal hurdles. Wolfers’ asks:

Are prediction markets legitimate business tools, an alternative set of securities markets requiring SEC regulation, illegal betting markets, allowable games of skill, or something else altogether?

That’s a meaty question if there ever was one. Wolfers’ goes on to describe actions taken by the Commodity Futures Trading Commission to help sort it out including determining whether or not the markets fall into their jurisdiction.

Is it me or does the phrase “prediction market” seem to be one of the latest buzzwords?  McKinsey Quarterly recently published an article about regarding the Promise of Prediction Markets.  The article is actually a roundtable discussion with several industry experts including practitioners from Best Buy and Google, a U of Chicago law professor and the author of The Wisdom of Crowds.

Obstacles discussed include organizational, cultural, legal and regulatory challenges.

Interesting stuff!

Note: The link above will probably only show you the abstract.  Provide McKinsey a valid e-mail address and you’ll have access to a wealth of interesting articles.

The Freakonmics blog has teamed up with Predictify to offer a prediction market for their readers. Using Freakonmics-related freebies as incentives, participants weigh in with their own predictions and see how they stack up compared to other predictions and eventually, reality. Find the center here.

Guest poster, Justin Wolfers, said a few words recently on the Freakonmics blog about prediction markets at Google.  I found the linked Googleblog post, “Putting crowd wisdom to work” quite interesting as it described how Google was “walking their own mission talk”…

At Google, we’re constantly trying to find new ways to organize the world’s information, including information relevant to our business.

This article describes how Google uses prediction markets to forcast product launch dates and other important strategic events.  What struck me about the more recent Freakonomics post, however, is that the question changed:

So we decided to move beyond asking, “Do prediction markets work?” and instead use them as a tool for better understanding how information flows within a (very cool) corporation. Information is terrific to theorize about, but hard to measure. That’s where the prediction market is useful: if you and I trade similarly on a market, then we can infer that you share similar information.

Yes!  It’s all in the asking the right questions.  How often have we improved our understanding of a system or event, just by asking the questions from a different perspective?

I enjoyed Tom Davenport’s (author of Competing on Analytics) recent predictions on prediction markets in his Next Big Thing blog at Harvard Business Press.

Predictably, he asks if prediction markets are “the next big thing.”  (Ok, enough with the prediction puns.)

Here are his observations regarding culture and markets:

For a company culture to value prediction markets, its culture would need to have certain (rare) attributes:

• Confidence that executives have valuable roles to play even if they don’t always have the right answer;
• A high level of trust in the intelligence and capabilities of employees;
• The willingness to follow numbers and analysis wherever they lead (as long as they are more-or-less consistent with common sense);
• A pretty strong analytical and financial orientation (since futures markets aren’t something that every Joe or Jane understands).

If you catch his post, be sure to check out the discussion that follows.