Prediction Markets Foretell Online Trends
By Tom Ryan
A retail-industry think tank at the University of California, Riverside, has launched a new website that relies on “prediction markets” to
foretell online sales and other internet-related trends, such as which e-commerce
sites will likely survive.
Under the method, also known as “competitive forecasting,” websites pit users against each other to determine who is the most prescient about a certain topic. Proponents claim the method, publicized in James Surowiecki’s book, The Wisdom of Crowds,
can yields more accurate results because participants care much more about
their answers than in a phone survey.
“It’s increasingly hard to get people to participate in research studies,
but they’re very eager to participate in prediction markets,” Thomas Novak,
a director of the Sloan Center, the think tank, told The New York Times. “Consumers
are actually coming to you, which seems to me what the web is all about.”
the best-known successes of the prediction markets is Cantor Fitzgerald’s Hollywood
Stock Exchange, which last year predicted 32 of the 36 major-category
Oscar nominees and over the last three years has correctly predicted 92 percent
of the major-category Oscar winners. The Iowa
often predicts election results more accurately than pre-election polls.
Under Sloan Center’s eLab
Exchange, users sign up for free, assume an online
identity, and then answer a slate of questions. The site ranks users on the
quality of their answers, and offers a gift certificate of $25 monthly to the
top-ranked participant. Every three months, the top-ranked user wins a $500
Prediction markets offer unreliable results if too few people care enough about a topic to answer questions carefully, but Mr. Novak believes $25 and the promise of e-commerce industry fame will attract at least “hundreds of people.” In addition, the site was designed so people could choose the most interesting questions to answer. The eLab Exchange will count on discussion boards and blogs devoted to niche internet topics to drive traffic.
While the Sloan Center doesn’t intend to market its data, other companies, particularly software vendors, are coming up with business research practices around prediction markets. According to the Times, these companies say demand has jumped over the last year, both from organizations like the Sloan Center who want to create public sites, and from corporations like Best Buy, Hewlett-Packard and others looking to create private websites to devise business strategy with the help of their employees.
Zubin Dowlaty, vice president of emerging technologies for InterContinental Hotels Group, recently used online prediction markets to ask employees which new technologies the company should invest in.
“Compared to polling people, this significantly improves the process of harvesting and prioritizing ideas,” Mr. Dowlaty told the Times. “And the cost is extremely low, relative to surveys or engaging a consulting firm.”
But Robin Hanson, an economics professor at George Mason University and a consultant to companies building prediction markets, said he was skeptical about many businesses forming around the concept, because outside of politics, movies or sports, few subjects entice people to render carefully considered opinions. “It’s kind of like a job,” he said.
Discussion Question: What do you think of the value of prediction markets around consumer research? In what ways might they be better than traditional consumer surveys? Can participants be enticed to express opinions about consumer products, as they do with movies and sports?