Prediction Markets

Prediction Markets


Idea markets have been used effectively outside the corporate world for more than fifteen years. Since 1988, the Iowa Electronic Markets have predicted presidential election outcomes more accurately than traditional polls 75 percent of the time. Similarly, the Hollywood Stock Exchange has forecast Oscar winners more effectively than even the most seasoned media critics seven years running.

From Harvard Business Online


Four Conditions that Characterize Wise Crowds

1. Diversity of Opinion--> A broad range of people with private info

2. Independence --> Opinions are not determined by thoese around them

3. Decentralization --> People specialized adn draw on local knowledge

4. Aggregation --> private information is drawn together into collective judgment

From The Wisdom of Crowds by James Surowiecki


What's Next: The Idiocy of Crowds: Collaboration is the Hottest Buzzword in Business Today. Too Bad it Doesn't Work

by David H. Freedman, September 2006 issue of Inc. Magazine


“As far back as 1972, in his now classic book, Victims of Groupthink, Yale psychology researcher Irving Janis theorizes that groups often breed a false confidence that leads to unsound decisions none of the individuals in the group would have made on their own. In the 1990s, research by Purdue psychology researcher Kip Williams shed light on "social loafing"--that is, the tendency of people in groups simply to not try as hard as individuals. In fact, the notion that individuals outthink and outdecide groups is so well established among experts that they don't bother to study it anymore. Instead, the hot question among psychologists and organizational behaviorists is why the rest of us persist in keeping this wrong-headed notion alive. "We've been trying to find out what seduces us into thinking teams are so wonderful," says Natalie Allen, a psychologist at the University of Western Ontario who has studied what she calls "the romance of teams." “


“So what about the wisdom of crowds? Did Surowiecki really get it wrong? Not necessarily. He simply focused on the sorts of situations in which large groups of people can in fact work pretty well. A group of investors will usually outperform a single expert; the bad opinions in the crowd tend to cancel out, so that the average is "wise." Google can tap a sea of websites to provide useful answers, and crowds have done a great job creating Linux, because in these cases useful contributions from the crowd can be leveraged while noncontributors stay harmlessly out of the way. And to his credit, Surowiecki does note that crowds often are not very wise at all.”


“What he glosses over, however, is the often spectacular way groups fail in the context of organizations. Consider that paragon of group magic, the brainstorming session. Bernard Nijstad, a psychologist at the University of Amsterdam, explains that if you take a group of 12 people and have half brainstorm together on a topic while the other six go it alone, all 12 will usually agree that the group experience was more productive--even though those working alone almost always end up with more good ideas. Nijstad believes it's because people in groups spend most of their time listening to others rather than thinking on their own, while lone brainstormers are forced to stew in productive but unpleasant silence. "When you're alone, it's painfully clear when you're not producing. In a group you can just sit there and not notice you're not contributing," Nijstad says. No wonder we love to work in groups.”


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