Prediction markets (also known as predictive markets, information markets, decision markets, idea futures, event derivatives, or virtual markets) are speculative markets created for the purpose of making predictions.
Around 1990 at Project Xanadu, Robin Hanson used the first known corporate prediction market. Employees used it in order to bet on, for example, the cold fusion controversy.
The simExchange introduced a perpetual contract that it calls “stocks” to predict the global, lifetime sales of video game consoles and software titles. These stocks do not expire like most contracts on prediction markets because the founder, Brian Shiau, argued that video game sales can continue for years. The premise for these stocks is that Shiau believes the video game industry suffers from a lack of comprehensive sales data” and he compares the information problem of a game’s sales to the information problem of evaluating a company’s market value. it can be said that such a prediction market can work but will be confined to play money.
Best Buy, Motorola, Qualcomm, Edmunds.com, and Misys Banking Systems are listed as Consensus Point clients.
Hewlett-Packard pioneered applications in sales forecasting and now uses prediction markets in several business units. Mentioned in academic publications from HP Labs. Also mentioned in Newsweek. It is working towards a commercial launch of the implementation as a product, BRAIN (Behaviorally Robust Aggregation of Information Networks).
Corning, Renault, Eli Lilly, Pfizer, Siemens, Masterfoods, Arcelor Mittal and other global companies are listed as NewsFutures customers.
Intel is mentioned in Harvard Business Review (April 2004) in relation to managing manufacturing capacity.
Microsoft is piloting prediction markets internally.
France Telecom’s Project Destiny has been in use since mid-2004 with demonstrated success.
Google has confirmed that it uses a predictive market internally in its official blog.
The Wall Street Journal reported that General Electric uses prediction market software from Consensus Point to generate new business ideas.
BusinessWeek lists MGM and Lionsgate Studios as two HSX clients.
HSX built and operated a televised virtual stock market, the Interactive Music Exchange for Fuse Networks Fuse TV to be used as the basis of their daily live television broadcast, IMX, which ran from January, 2003 through July, 2004. The television audience traded virtual stocks of artists/videos/songs, and predicted which would make it to the top of the Billboard music charts. The first of its kind, Fuse Network and HSX won an AFI Enhanced TV (American Film Institute) Award for innovation in television interactivity.
Star wood embraced the use of prediction markets for developing and selecting marketing campaigns. Marketing department started out with some initial ideas and allowed employees to add new ideas or make changes to existing ones. Then subsequently incentives based prediction markets were leveraged to select the best of the lot.
Next practices for Marketing Research
Though predictive markets have spread beyond early-adopting companies in the technology industry, they have still not become mainstream social analytic tools. The next practices for Predictive markets for marketing research are described in the following paragraphs.
a) Determine Future Trends – market research : cloud computing
Consensus Point partner and client, international consulting firm Logica, has just released the results of their latest prediction market research about cloud computing. The experts at Logica are leveraging this market intelligence to assist organizations with the best solutions to maximize cloud computing in their business.
Over a 6 week period, Logica used Consensus Point’s prediction market platform to engage their employees, their customers, leading academics and key decision makers to better understand and predict the future of the cloud. The market, named “Logica Future Scope”, aggregated the disparate opinions of 100s of cloud and business experts and highlighted the factors that are both driving and inhibiting the growth of cloud today. This valuable market research includes future trends and insights on many critical areas, such as the impact of security events on the demand for cloud services.
Logica was looking for new ways to engage and source the wisdom of the crowd in order to better understand the direction of future trends. Consensus Point’s prediction market provides them with an environment that encourages insightful debate and contributes to true thought leadership.
b) Real time Focus groups
Prediction markets give the ability to let organizations’ know what’s out there and what’s in the future – in a way that is more accurate than any other trends method – so they can better manage their business. Through predictive markets organizations provide clients with real-time focus groups that is called a ‘living leadership forum.’ Any changes in the views of the group and the marketplace are quickly detected, which means businesses are rarely caught off guard.
c) Light weight Innovation
By combining idea management tools with prediction market tools, the partnership deliver sophisticated but fun ways of quickly gathering and evaluating the potential of new business innovations. More importantly, the combination of these tools opens the door for disrupting innovation systems inside companies in ways that allow lightweight innovation to happen earlier one of the novel characteristics of prediction markets within organizations is that it allows senior leaders to directly ask questions of and listen to what the entire organization is thinking, without having it filtered through middle managers. That is an incredibly disruptive shift in information flows. Because it means that little ideas that could be quickly prototyped using lightweight models – fast, capital efficient, and end-user engaged – won’t get filtered out through multiple levels of management. Senior leaders will be able to see the constellation of ideas and innovations rather than just the filtered picks of breakthrough ideas. This is first step to driving organizations towards a model of fast, incremental innovation and away from a Quixotic quest for blockbuster ideas.
iv) Improve concept testing
Quickly and easily identify the best ideas and concepts:
- Increase the speed with which organization selects ideas and determine which concepts are most desired by the market
- Significantly reduce your concept and ideation research costs
- Test more concepts with clearer differentiation among ideas
- Obtain more accurate answers with less effort
- Offer a more engaging tool for respondents than traditional research methods
Predictive markets is proven to accelerate time to market and to lower total cost of research. Prediction market enables companies to quickly arrive at a “consensus” and determine which ideas and concepts are going to be winners in the market. Get the answers in a few days as opposed to a few weeks at a fraction of the cost of traditional research. The technology enables corporations and research organizations to create and manage private prediction markets.
By tapping the predictive powers of collective wisdom and gathering information on market desires — marketers can achieve a higher level of business performance and a competitive advantage. Develop the best ideas with the right features more quickly and more cheaply.
Prediction market participants are invited to buy shares in virtual “stocks” representing new product, packaging, design or creative concepts. Traders are rewarded according to their prediction prowess, with real-world cash prizes going to those traders who make the best predictions. Ample details about each stock in the market are provided so traders can make the most informed trading decisions possible.
More accurate identification of “winner” and “loser” concepts
In validation studies prediction markets have proven more accurate at predicting the success of new concepts than traditional monadic concept tests. Prediction markets also tend to produce more polarized ratings of the concepts tested, making it easier to differentiate between not only good and bad concepts, but also between good and great concepts.
It can take up to 4-6 weeks to design, field, and analyze a traditional concept test. prediction market turn-around time concept tests is much less – just 1 week from project kick-off to presentation of final results. The projects are completed more quickly due to ease of setup, respondent recruitment, and data analysis.