Google Adopts Prediction Markets

First published, in slightly different form, at the MarComBlog of Auburn University.

Last week, I wrote some about prediction markets. These are markets where hundreds, even thousands, of participants, each armed with "some" knowledge, pool their thinking to make better predictions than pollsters, better decisions than "experts".

(Note: Wikipedia's Prediction Market article is a good starting place if you want to learn more, as is James Surowiecki's The Wisdom of Crowds (search inside at Amazon).)

But what applications do prediction markets have for business and PR practitioners? The evidence is thin to date, but last week, Google announced it's using prediction markets to make better internal decisions:

At Google, we're constantly trying to find new ways to organize the world's information, including information relevant to our business. Building on the ideas of Friedrich Hayek and the Iowa Electronic Markets, a few Googlers (Doug Banks, Patri Friedman, Ilya Kirnos, Piaw Na and me, with some help from Hal Varian), set up a predictive market system inside the company.

The markets were designed to forecast product launch dates, new office openings, and many other things of strategic importance to Google. So far, more than a thousand Googlers have bid on 146 events in 43 different subject areas (no payment is required to play).

We designed the market so that the price of an event should, in theory, reflect a consensus probability that the event will occur. To determine accuracy of the market, we looked at the connection between prices of events and the frequency with which they actually occurred. If prices are correct, events priced at 10 cents should occur about 10 percent of the time. (Read more)

Google claims the prediction market is working: prices quickly reflect what's likely, and entropy declines significantly over time. Just as you would expect in a functioning market.

The next step (and Google doesn't say if they have or will take it) is to use prediction markets to make better management decisions. To do so would be a significant departure from management doctrine, which is that -- no matter how "flat" your organization -- most important decisions are made by the CEO/COO/CFO. But if markets, no matter how much the participants are laypeople, make better predictions than experts, then that's the logical next step.

Looking back on my own tenure as CEO of a 125-person agency, and as Finance Director of a 13,000 member association, I am pretty sure the "market" -- had we had them -- would have made some different decisions than I and my management colleagues made.

What's this mean for PR practitioners? Probably little, now, since prediction markets are only now slipping in to management's minds. But if I were doing PR for Microsoft's MSN Virtual  Earth, I would be concerned about this graph, for example. Taken from the Yahoo Research Buzz Game, a prediction market, it shows how poorly the "buzz" around MSN Virtual Earth (red dots, bottom graph) has been compared to GoogleEarth (blue dots). And how the "market" views the two properties (top graph). (Note, the green lines denote NASA's product).

I've had only a few clients where a prediction market could have been deployed effectively (it takes a fairly good-sized pool, I believe), but I've no doubt the market would have made some of our marketing decisions easier and faster.

Posted by Allan Jenkins on September 27, 2005 at 09:53 PM in Advertising, Communication, Corporate Management, Economics, Prediction Markets, Public Relations, Smart Communities, Social Tools, Society, Technology | Permalink

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