MIT on Prediction MarketsThe MIT Center for Collective Intelligence has as one of its projects development of a comprehensive Handbook of Collective Intelligence.
The Handbook's page on prediction markets provides a helpful summary of types of prediction markets, research on their nature and reliability, and ideas for further research.
The list of benefits of prediction markets is a helpful reminder of why the topic is important. As summarized by the (typo-prone and grammar-challenged) collective authorship of the Handbook, prediction markets are valuable because:
- Traders can correct their own biases, assuming they can see how others are voting.
- Traders get a bigger picture that has a high signal-to-noise ratio. The aggregated prediction is a reasonably good summary statistic of many people's reading of the situation.
- Organizations can be more agile, since agility depends partly on being able to better anticipate the future.
- Availability of internal prices (shadow prices) leads to more precise asset allocation. For example, using a prediction market at a firm could lead to more individualized service if it informs sales staff about how much it would cost to accelerate orders to satisfy a particularly important customer.
- Contingent contracts can aid decision making. (However, one needs to be cautious about interpreting contract prices as probabilities for contingencies, since it is easy to mistake correlation for causation.)
Labels: Prediction markets