By Tom Ryan
Companies like Best Buy, General Electric and Hewlett-Packard are using online prediction markets to try to improve forecasting, reduce risk and accelerate innovation by tapping into the collective wisdom of their work force.
Applied to companies, employees make their wagers over the internet using virtual currency, betting anonymously on what they think will happen. The payoff for the most accurate players is typically a modest prize, cash or an iPod.
Popularized by James Surowiecki's 2004 book The Wisdom of Crowds and used in the past to bet on political elections, news events, video game sales, and movie box-office receipts, prediction markets have often been more accurate than professional pollsters or market researchers. The idea is that the collected knowledge of many people, each with a different perspective, will turn out to be more accurate than an individual or small group or even experts.
For corporations, prediction markets can spur communication and collaboration within a company - much like blogs - yet also add a rigorous measurement to business forecasts, like estimating the sales of a new product or the chances that a project will be finished on time. According to The New York Times, early results are encouraging.
"The potential is that prediction markets may be the thing that enables a big company to act more like a small, nimble company again," Jeffrey Severts, a vice president who oversees prediction markets at Best Buy, told the newspaper.
Best Buy has experimented with prediction markets on everything from demand for digital set-top boxes to store-opening dates. For example, in the fall of 2006, the prices in a prediction market on whether a new Best Buy store in Shanghai would open on time - in December 2006 - dropped sharply from $80 a share into the $40 to $50 range. Players made yes-no bets, and the virtual dollar drop reflected increasing doubt that the store would open on time. The store wound up opening late, in January 2007, but the warning signs from the prediction market helped prevent further slippage.
Mr. Severts noted that prices in a current prediction market - betting whether new offerings from its Geek Squad service will be introduced on time in June - are in the $90 range, an encouraging sign.
Best Buy plans to move beyond pilot projects in prediction markets to involve more workers throughout the company, starting next month. "It helps on two fronts, the speed and accuracy of information, so that management can move faster to deal with problems or exploit opportunities," Mr. Severts said.
Discussion Question: What do you think of the potential of prediction markets as a decision marking tool for retail companies?