Thursday, April 10, 2008

Prediction Markets Explained

Last week, Mark Lorence posted a topic for discussion on prediction markets and questioned if it would have been an effective tool for British Airways in the opening of the T5 terminal in London. I wanted to provide a quick follow up, as the topic of prediction markets was in the NY Times yesterday with references to different organizations that are using them to predict sales forecasts, store openings and project completion dates.

If you have an interest in the software and services companies who provide platforms to facilitate a prediction market, you should check out Inkling Markets, Consensus Point and NewsFutures. Each company provides the technology and infrastructure to setup and manage prediction markets. To give you a sense of the type of problems that a prediction market can be used for take a look at the Inkling Markets home page. They have examples such as "Improve Forecasting of Performance Indicators", "Expose Quality Problems" and "Predict Risk in Your Supply Chain". All real issues that many organizations need to address.

If you want to see how a prediction market may work for something like sports, politics or weather, I would recommend taking a look at You could argue this is simply a gambling website since the trading is performed with real money, but if you look a little closer you will find some interesting information. For example, according to the current "2008 Democratic Presidential Nomination", the current trading price for Barrack Obama is 85.5, which means that 85.5% of the market predicts that he will be the democratic nominee. In other words, the "market" strongly believes he will be the nominee. If I were to purchase options at this price and he were nominated, I would earn $14.5 per block of shares ($100 - $85.5) I purchased. If he did not receive the nomination, I would lose my entire investment since the value would be $0 when the market expires, which should be August 28th at the DNC.

Bo Cowgill from Google, who is a speaker at the DIG 2008 conference, runs Google's internal prediction markets. He is also an expert on the topic and operates his own blog on the topic of prediction markets. Also take a look at Midas Oracle. We are looking forward to hear Google's story from Bo at the conference.

One interesting side note is that there is a market on for Google's Lunar X project and if it will be won on/before 12/31/2012. The current price is 24.3.

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