Cashing in on Online Prediction Markets

garzpacho writes "BusinessWeek takes a look at the use of prediction markets to forecast business success. These markets have been taking the form of games online--the Hollywood Stock Exchange, for example, allows players to bet on the success of movies. Hollywood is currently one of the largest consumers of prediction market data, in part because movies' broad appeal leads to a large number of players, but also because the markets have been surprisingly accurate--92% in picking Oscar winners over the last three years. Because of this success, other industries are taking a look; pharmaceutical and tech storage businesses are currently working to set up their own markets."

Comments

More serious example

[hcdejong]

StrategyPage runs a prediction market on geopolitical events, with a similarly high success percentage.

Terrorism Futures Market

[rothlmar]

If you'll recall, a similar terrorism futures market was planned by DARPA; it fell victim to political pressure, got deep-sixed, and the proponent, John Poindexter, resigned in a cloud. But the truth is that the idea works well. Here's a summary of the controversy: http://www.wired.com/news/politics/0,1283,59818,00 .html.

Re:Well, duh (re: Hollywood)

[TubeSteak]

The Oscars are a popularity contest, so of course a prediction market will be accurate.

I find myself agreeing with that sentiment.

From TFA: "The Hollywood Stock Exchange gives traders just enough information to be able to play the market."

You don't have to worry about risk to predict the success of a movie.

To do predictions for something like pharmaceuticals, you need vastly more technical information... something that pharma companys are loathe to part with (results of unreleased clinical trials for example).

Otherwise, you're just guessing at the risks involved.

Old field

[tansey]

This is actually a fairly old field of statistics. The story goes that a mathematician at a state fair saw there was a contest to see who could guess the weight of a pile of recently slaughtered beef. Everyone was allowed to guess at it: farmers, house wives, butchers, etc. In the end, the experts (i.e. the butchers) didn't win, and their answer was off by about 10%. However, the total of all the answers, averaged, was off by only .2 lbs.

This sparked the idea that the knowledge of the whole group can lead to better answers than the knowledge of a select group of experts. It's also been shown to be true with things like artificial intelligence and mathematical proof programs.

So it seems like hollywood and the like have just finally realized that the entire group of people can do better at predicting movie success than just some panel of marketing experts.

Perception and reality

[EmbeddedJanitor]

which diseases people most wanted a cure for (something you could likely figure out from how many had those diseases to begin with)

Perception and hype are not the same as reality. For instance, TB kills more people than AIDS, yet which is perceived to be more important to treat? There's a lot of discussion and hype about breast cancer, yet prostate cancer is more serious.

Perception drives our irrational thinking.