Posted by: Paul Hewitt | November 24, 2009

Idea Pageants = Prediction Markets?

Recently, McKinsey released an interactive summary of their Global Survey of Enterprise 2.0 applications.  About 2,000 companies take part in the survey each of the last three years.  One of the categories surveyed is Prediction Markets.  Apparently, in 2007 the level of adoption among the responders was less than 1%.  In 2008, the adoption rate jumped to 9% and slipped slightly to 8% in 2009.  A pretty remarkable achievement, don’t you think?

Let me ask you, based on published reports over the last two or three years, does it seem that prediction market adoption has jumped by this much?  Certainly, I don’t see it.  Maybe there are other reasons for the results. 

  1. The survey sample may not have been representative of the population in any of the years. 
  2. The definition of “adoption” may include very limited trials and pilot projects involving prediction markets. 
  3. The definition of “prediction markets” may include some collective intelligence applications that aren’t really true prediction markets.

I happen to think that the third reason is the most likely culprit.  Most, if not all, of the prediction market software vendors include an idea pageant type of “prediction market” in their offerings.  I’m willing to bet that McKinsey includes these types of markets in the definition of prediction markets.  I’d also be willing to bet that these are the types of markets that are growing in adoption over the last couple of years.

Idea Pageant Growth

Relative to true prediction markets (I’ll get into the distinction below), idea pageant markets are a pretty easy sell to senior management.  There is very little downside, if any, to trying them out.  There are no political “feathers” to ruffle in the process.  There is tremendous upside potential in identifying previously undisclosed new ideas.  Senior management doesn’t have to rely on the crowd to filter out the weaker ideas (but it should).  Essentially, it is a high tech electronic suggestion box with a built-in feasibility filter.  What’s not to like?

But is it a Prediction Market?

Typically, idea pageants are set up to solicit new ideas from the participants (usually employees).  The same individuals place investments on the ideas they think are most likely to be adopted or receive funding.  This investment aspect is carried out in a market that resembles a prediction market.  It also looks a lot like a horse race market (without actually running the race).

In a true prediction market, the participants make investments in shares that represent potential outcomes.  In effect, the shares are derivatives of the actual future outcomes.  When the outcome is revealed, the share that represents the actual outcome is paid off and all other shares are worthless on expiry.  Note that the outcome is determined or occurs independently of the results of the prediction market.  The market attempts to predict the outcome, it does not determine the outcome.  The “horse race” must be run to determine the outcome.

In an idea pageant (think of a beauty pageant for ideas), the mechanism is similar to that of a prediction market.  Participants place investments on binary share contracts.  If a company is trying to find the best idea to pursue, the idea pageant becomes a poll of the opinions of the participants.  It is a weighted poll, because those who are more adept at guessing the ideas with the best potential will have more wealth to invest (vote).  The market determines the idea with the best chance of success, as determined by the weighted “votes” of the participants.  A true prediction market predicts a future outcome, which is determined independently of the operation of the prediction market.  In an idea market, the future outcome is the “prediction” of the market.

Alternatively, some idea pageants are set up to “predict” the idea that will be pursued (or receive venture capital).  This means that someone (or a panel) will make a decision about which potential outcome will be “true”.  In this case, the market is really being asked to predict the idea that the judge will select, not the idea that is “best”.  There is a big difference. We are constantly finding examples of prediction market failures in these types of markets.  Olympic site selection, Nobel Prize in Economics, etc…

Conclusion

Oddly enough, I think there is a place for idea pageants in the corporate world.  I just don’t think there’s a place for them in the definition of a prediction market.  If we were to remove all of the idea pageants in the McKinsey survey, I’m willing to bet that the true prediction market adoption rate is still around 1%.

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Responses

  1. […] An explanatory post by Paul Hewitt. […]

  2. Hi Paul, there is an incredible amount of interest in using prediction market (PM) for idea filtering. Crowdsourcing = ideation, crowdsourcing = PM therefore ideation = PM. For vendors in the space, it is an attractive market.

    However, I agree 100% that a PM is not the ideal mechanism for sorting and ranking ideas. A better mech being some kind of voting or weighted voting.

    The beauty of a PM is that the incentives are to estimate an objective metric, where as, in the ideation stage, it is being used to estimate endogenous group think. The implementations I have seen have been overly complicated with the “winning” idea some kind of combination of price, activity and other factors – all very black box.

  3. […] If the adoption rate is correct, why aren’t we seeing a significant spike in reported success stories?  There has been very little reporting of any prediction market results – good or bad.  I suspect the companies that have “adopted” prediction markets have done so in very limited pilot studies.  Here’s another possibility.  A quick review of several vendor websites indicates that many of the success stories involve idea pageant (or idea market) “prediction markets”.  I’m willing to bet that the companies that implemented these “markets” were included in those “adopting” prediction markets.  While this type of market does involve collective intelligence, it isn’t really a prediction market. […]

  4. […] used, as I explained, here.  The other application is not really a prediction market, but rather an idea pageant, using crowd sourcing to identify the best ideas among many.  Pretty slim pickings, considering […]


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