Wednesday, May 7, 2008

Prediction markets used by business

McKinsey article on how Best Buy started out:
We ran a similar experiment later that year, when 350 random people predicted our holiday sales. Once again, the nonexperts, off by just one-tenth of 1 percent, were more accurate than the experts, who were off by 7 percent. The participants were surprised by the outcome when we shared it with them well after the actual results were in and reported. These early experiments encouraged us to get into prediction contracts, and we have to date seen over 2,000 traders make a total of 70,000 trades on 147 contracts.
Google uses them as well:
We launched our prediction markets in April 2005, and since then we’ve asked about 275 different questions, and there’ve been some 80,000 trades. Around one-quarter of our markets have to do with demand forecasting—for instance, “How many people will use Gmail in the next three months?” Almost all Google products have had, or still have, a prediction market about their usage. Another 30 percent concern the company’s performance—for example, will project deadlines be met? A smaller category concerns things that could happen in our industry, such as mergers and acquisitions that might impact Google significantly.

1 comment:

  1. There's a book called "The Wisdom of Crowds" that speaks to this very phenomenon. My studies have kept me from reading it all the way through, but it is very interesting if not gripping. It also gets into a little game theory and behavioral economics...