Posted by: Paul Hewitt | March 12, 2009

Comment on Midas Oracle re: Enterprise Prediction Market success factors

Clearly, to be successful, an EPM must be more accurate than other means of forecasting, given the cost of setting up and running the market (i.e. benefits > costs). Also, it has to provide predictions for conditions, events or actions, sufficiently in advance, such that the corporation may take action to mitigate losses or take advantage of expected opportunities. The corporation must be able to change course, if the prediction market indicates that this would be wise. If the enterprise is unable to act, even with better information, the value of the prediction is minimal.

A major determinant of an EPM success should be their ability to measure uncertainty regarding predictions of future conditions, events and actions. This would allow corporations to focus their contingency plans (including hedging, insurance, etc…) in the areas most likely to require them (and avoid wasting resources on unlikely future situations).

Of course, the prediction markets must operate effectively, meaning they must have a “crowd”, that has diversity, independence and is decentralized. Ideally, successful markets should not exhibit risk-seeking behaviour by the participants, as most prediction markets are employed to reduce decision-making risk. I fear that most prediction markets employing market scoring rules provide substantial incentives for participants to become risk-seeking. As a “work around” for a failure to attract a “crowd”, MSRs are good for creating liquidity, but not so good for obtaining accurate predictions.

Just a few comments for now.

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