Some Predictions about Prediction Markets

The barriers to adoption of prediction markets are primarily cultural, and I don't see them changing anytime soon

With YAGA (yet another Google article) out recently on the use of prediction markets at the company, I thought I'd comment on whether prediction markets are, as many would have it, the next big thing. The article notes that Google runs a variety of prediction markets to get a bottom-up reading on questions like how many users a new product will attract, when a new office in a particular city will be opened, and so forth. There is not much doubt that prediction markets are useful, as not only Google but also Hewlett-Packard (HP used them for sales forecasts several years ago), the Hollywood Stock Exchange, the Iowa Electronic Markets, New Yorker writer Jim Surowiecki (in The Wisdom of Crowds) and a few other companies have discovered.

But why so few? If this is such a great way to generate useful insights for decision-making (and I believe it is), why don't more companies take advantage of it? If the crowds are so wise (and they are, under the right circumstances), why do most senior executives ignore them? Will we see prediction markets spreading over lots of different organizations? Is this the new way to be wise?

I think the barriers to adoption of prediction markets are primarily cultural, and I don't see them changing anytime soon. Let's say that your company runs a prediction market on first-year sales of a new product, and the results come out not so positively. Let's say that the employees who participate predict much lower sales than, say, the product manager for the new product, the division president, and the CEO. The fact that the crowd may be more accurate is not the point, or at least not the only point. The crowd has made the hierarchy look bad, and the hierarchy doesn't generally like to look bad.

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).

Google seems to have all these attributes. HP had them at one point, but then lost them under Carly Fiorina—which may be why we don't hear much about prediction markets at HP anymore. Most organizations don't have them. I wish we would see lots more prediction markets, but I suspect we won't.
- Harvard Business Online January 15, 2008