Mercury's Blog

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http://blog.mercury-rac.com/2008/05/05/prediction-markets-using-them-for-innovation-and-ideas/

Mercury's Blog

Prediction Markets - using them for innovation and ideas

Posted: 05 May 2008 04:20 AM CDT

If you haven’t read it, the New York Times recently published a good
article on prediction markets. It covered the usual topics and
players, with quotes from Robin Hanson, Emile Servan-Schreiber, and
discussion about Inkling Markets and Xpree. More importantly the
author had some great quotes from Jeff Severts at Best Buy and Zubin
Dowlaty of InterContinental Hotels about their experiences with
prediction markets. (Though not mentioned, they use ConsensusPoint and
NewsFutures software, respectively.)

For anyone that’s read this blog, there is likely little new in the
article that you haven’t heard before. It’s great that it was focused
more toward corporations and how companies use them, and I hope that a
steady drumbeat of articles like this will help generate the momentum
for more widespread acceptance and use of prediction markets.

But I want to focus on one aspect of the article; using prediction
markets for innovation. I believe that while you can use prediction
markets to help quantify innovative ideas, using PM’s to prioritise
ideas is a poor use of the tool.

Prediction markets exist to forecast a variable; this may be a metric
(such as sales figures), or a probability (which candidate will win
the election). For markets to work effectively, the variable should be
well-defined, such as US sales in Q1, will the Minneapolis office open
on schedule, etc. By their very nature, ideas tend to be quite poorly-
defined. Before an idea is ever put into place, significant work takes
place to develop it within a company.

When companies start using prediction markets to “harvest and
prioritize ideas” I believe they are using a prediction market
incorrectly. The traditional prediction market is run on a variable
that’s both well-defined and committed. (You are going to continue
selling a particular widget; the project to open the Minneapolis
office is going to happen.) However, running prediction markets to
assess ideas that may change before implementation or may not happen
at all turns the entire process into a simple beauty pageant. A beauty
pageant doesn’t find the most beautiful girl, it finds the girl that
the particular judges on the day find beautiful.

The New York Times had an interesting article recently that discussed
this issue from a different tack. “Is Justin Timberlake a Product of
Cumulative Advantage” discussed a study which tracked how identical
songs become (or didn’t become) popular in separate social groups.
Similar principles easily translate to prediction markets on ideas. In
a phrase, this is the problem:

"social influence played as large a role in determining the market
share [price] of successful songs [ideas] as differences in quality."

So what can you do to harvest collective intelligence to generate,
prioritise and quantify ideas?

Go out there, generate some great ideas in your company. But don’t use
a prediction market to prioritise them; social influence plays too big
a role since the market is (at that point) too ill-defined and it
hasn’t been committed to by the company. Prioritise them somewhere
else.

Once the list of ideas has been fully developed vetted down to a
handful of well-defined ideas, then a prediction market could be
useful to quantify the opportunity. At this point, traders would know
enough about the opportunity to judge the potential outcome of putting
them into practice, and the outcome should be reasonably accurate.

To be fair to InterContinental Hotels (which is quoted as using
prediction markets for this), they are actually a NewsFutures customer
and use their Idea Pageant software, instead of the normal Prediction
Market software. (The Idea Pageant seems to be an effective way of
doing the non-prediction-market prioritising that I mentioned above.)
However, there are a number of companies that do use standard
prediction markets to prioritise new ideas.

If you’re using prediction markets for this, I would suggest you stop.
As discussed in the New York Times article above, the first-movers and
influencers are very influential when assessing new ideas. When an
idea is new and ill-defined, people put much higher priority on
information from their social network instead of their own
impressions. If you took the same set of initial ideas to a completely
different group of people in your company you may get a very different
set of results. This means that you’re not judging what people in the
group think collectively, you’re measuring what that particular group
thinks.

Post from: Mercury's Blog