Predictable Problems Deploying Prediction Markets

Prediction Markets are proven, powerful tools to assist with forecasting and decision support. The recent Conference on Corporate Applications of Prediction/Information Markets provides excellent case studies from numerous enterprises that are capitalizing on these capabilities today. Much academic research has been conducted and is publiclly available validating the effectiveness of prediction markets and their application in predicting election results provides a highly visible consumer application.

Despite this, as noted in a recent article in Inside Knowledge Magazine, the number of companies that have implemented an internal prediction market is modest (lower bound was in the 30s as of 2006, although growing rapidly). Feedback from companies utilizing prediction markets has identified critical deployment considerations, including trader knowledge, question/security design, and trader participation however the limited trials and low adoption rate of prediction markets indicates that resistance to their use pre-dates these deployment considerations.

Tom Davenport, a Professor as Babson College, has identified traditional hierarchical organizations as a major obstacle to the use of prediction markets (as well as trader participation once deployed). At BitInsight (www.bitinsight.com), a consulting firm utilizing prediction markets as part of a decision support service, our experience would concur with this organizational resistance. The resistance ranges from disbelief in the process, concerns about data leakage, concerns about the impact on current business processes, and concerns that the process will “undermine management” (to use the words of Microsoft in their presentation on their prediction market, PredictionPoint).

By definition prediction markets are highly visible and if not carefully managed can be controversial, note the furor over DARPA’s terrorism futures market. This visibility adds to the personal risk from failure and precludes “skunk work” executions in most cases. The (ideally for many questions) cross organizational nature of the trading pool also adds organizational obstacles to market introduction.

Prediction markets are the data mining tool to access the unstructured data stored in the enterprise’s distributed human capital (broadly defined). It provides another source of data to be considered and leveraged; it does not, per se, make or even recommend any decisions to the corporation. Defining the tool as such may make it more palatable to senior management whose buy-in and support are absolutely critical to successful trial and on-going incorporation of this technique within the enterprise’s business processes.