Stock Tip: Bet on Collective Intelligence

As I’ve observed before, mar­shalling col­lective intel­li­gence, or the wisdom of crowds, on the Internet isn’t always very easy. Social news voting sites like digg are sus­cept­ible to social influ­ences. Wikis are also weakened by this: do you really want to edit what your boss says? One way, though, to generate the neces­sary con­di­tions (inde­pend­ence, self-​​interest, diversity) is to set up a virtual stock market.

In 2003, for example, the Pentagon set up a pre­dic­tion market for world events including ter­rorist activity, FutureMAP. It was rapidly closed down again when the press dis­covered this “People Betting on Terrorism Outrage!!!” However, as Time magazine reported last year, this wasn’t a clever move:

…the fact is, betting on ter­rorism actually makes sense. Consider the invest­ig­a­tion just launched in Washington over an apparent leak at the Department of Homeland Security in which insiders seem to have tipped off rel­at­ives about an alleged threat to the New York City subway system. Outrageous behavior? Perhaps. But get those “insider traders” into a market, and everyone will have access to that inform­a­tion. Insiders have a motiv­a­tion — money, at the basest level — to dis­tribute their knowledge.

The Hollywood Stock Exchange (HSX.com) uses pretend money to buy and sell the “stocks” of movies and stars. The pre­dic­tions made by the exchange are so accurate that the company sells its valu­ations and opening weekend pre­dic­tions to film pro­duc­tion studios. Popex (now defunct) did the same for the fortunes of pop acts. The Iowa Electronic Market’s election pre­dic­tions have out­per­formed major national polls, even months ahead of the election. The IEM’s pre­dic­tions have been out by just 1.37% in pres­id­en­tial elec­tions, 3.43% in other US elec­tions, and 2.12% in foreign elec­tions. This is despite the fact that members of the Exchange have mainly been men (viz. not women) from Iowa, and so not rep­res­ent­ative of the voting public.

So, inter­esting to hear about the launch of Inkling on Techcrunch. Basically, it’s a site for betting on future events in a stock-​​market sim­u­la­tion using pretend money, inkies. More innov­at­ively, the service offers Enterprise and Small Business versions of the service. The idea is that busi­nesses create stock exchanges within their com­panies to facil­itate decision-​​making. Google, Eli-​​Lilly and Microsoft already use pre­dic­tion markets intern­ally for this purpose.

You might set up a market for example, on which of your four products are going to be best-​​sellers. You open that up to as many people as you like — arguably your whole company, or even your customer base. The market should involve real rewards for correct answers. This would be the best approach because you need people to care about the answers they give. Because you are getting varied, inde­pendent, self-​​interested per­spect­ives, the answer given by the market is likely to reveal the truth.

This is better than a poll, because (a) it blends dif­ferent answers to set a price for the like­li­hood of various altern­at­ives and (b) it gives people a reason to use their best intel­li­gence, intu­ition and insider know­ledge because there’s a reward for them at the end for betting on what they really think will happen.

In a tech­no­logy company for example, the sales people probably know your cus­tomers best, but the engin­eers know the real cap­ab­il­ities and lim­it­a­tions of the product. Marketing, on the other hand, has an idea on what people like and what attracts press coverage. The sec­retary may have a bit of insider know­ledge. The cleaner may not know tech­no­logy, but he knows what sounds good. Combine all those per­spect­ives in the correct way and you end up with a far more complete picture than other methods are likely to achieve.

From the FAQ:

What is a Prediction Market?

Prediction markets allow a group of people to express an opinion over a period of time about the prob­ab­ility of an event occur­ring. A question is posed and people buy and sell shares in stocks rep­res­enting possible answers to that question. The highest priced stock at the end of a period of time is the group’s prediction.

Prediction markets are not only useful at fore­casting the future, they also provide invalu­able insight in to the per­cep­tion of a group of people, inform­a­tion that can be just as valuable as input to an upcoming decision or action as an accurate forecast.

Inkling is not the first pre­dic­tion market, but we believe it sets the standard for ease of use and setup, thus cap­turing the true ethos of what pre­dic­tion markets are all about: wide par­ti­cip­a­tion of a diverse group of people to col­lect­ively state an opinion.

Interesting news for digg:

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