A Caveat Concerning Prediction MarketsPrompted by a brief article by Cass Sunstein in the September 2006 issue of the Harvard Business Review, I'm revisiting today the topic of prediction markets, discussed in two previous posts.
In his article, Sunstein, a professor of both law and political science at the University of Chicago, makes a point that should almost go without saying: A prediction market should be used only in situations in which the correct answer is the answer participants are most likely (but not guaranteed) to give to whatever question is being asked.
This circumstance will prevail only if participants have access to relevant information about the subject under consideration. Each individual participant may very well have only incomplete information. The beauty of the prediction market is that it enables consolidation of what everybody knows into an answer with a high probability of being accurate.
Sunstein offers this example:
A computer company executive could sensibly rely on an internal prediction market if she is asking about completion dates for the company's own products in development. But should the manager ask employees about completion dates for competitors' products? That wouldn't be a good bet. When most people are not likely to be right because the group has little relevant information, it's best to ignore their judgments and to try to find an expert instead.I hasten to add that Sunstein's basic position is to endorse the power of prediction markets. Last month he published Infotopia: How Many Minds Produce Knowledge, which deals with the great benefits we can realize through using information-pooling tools like prediction markets, wikis, and open-source software.
Labels: Prediction markets