New research by Cowgill and Zitzewitz
investigates internal prediction markets used by corporations to evaluate new products or procedures. Compared to the more common political prediction markets, these markets have features that would seem to make them perform poorly. They tend to be thinly traded, bidders may have weak incentives, there is limited entry into the set of bidders, and the potential for traders with biases or ulterior motives. Despite that, Cogill and Zitewitz state:
The inefficiencies that do exist generally become smaller over time. More experienced traders and those with higher past performance trade against the identified inefficiencies, suggesting that the markets' efficiency improves because traders gain experience and less skilled traders exit the market.
So, there is learning-by-doing in bidding in prediction markets.
Hat tip: Marginal Revolution
Predicting future performance is tough, you almost never know what will happen in time. Learning curves are characteristic of many processes. As you produce more, you learn more from the experience, and this experience helps you produce future units at a lower costs (Froeb ET all, pg. 87 2014). All of the R&D, all of the field tests and all of the beta trialing in the world does not always prevent or predict the issues that may arise after a new product has seen its best days. As a product matures new issues will become exposed, costly issues at that. In some cases a recall will be required that may include a fix or even worse, a total replacement. On the other hand if the product requires a physical installation your technicians will get better as the product matures and faster at installing it; a cost saving for certain.ReplyDelete
Froeb, L.M., McCann, B.T., Ward, M.R. & Shor, M. (2014). Managerial Economics: A Problem Solving Approach. Mason, Ohio: Southwestern Cengage Learning.
“More experienced traders and those with higher past performance trade against the identified inefficiencies, …”ReplyDelete
This one statement concisely gels the theorem for much of what occurs in financial based markets in general. And part of the backing for my thought comes from a (now) long line of personal learning curve growth. One gains knowledge, wisdom, and experience through (an often tough and painful) trek in navigating financial markets (i.e. stock/equity and bond markets for example).
My initial exposures to equity markets, and unfortunately allowing an unscrupulous broker to buy and sell on my behalf resulted in a “churned” account with a lot of fees generated and a loss of principal. (A painful lesson.) As outcome of this event, I no longer trust anyone, learned which vehicles I could understand better, and settled on concentrating my investment efforts in various mutual fund categories.
Extensive reading lead my investing efforts to first back test different investment strategies and how the results would fare over time and events. (In the “early days” I had little money, so just saving, basic investment techniques, and “on paper only” investing were my operational motives.)
After observing how my gaining knowledge would fare in positive fashion, I cautiously invested in real time. The strategies of dollar cost averaging, diversification, hedging and buffering, and modified timing were combined for personal accounts, retirement accounts, trust accounts (for niece and nephew) and limited family partnership accounts.
To give proper perspective, I made learning about investing a passion and personal directive. Books, journals, courses, articles, discussions with professionals (attorneys, accountants, and my third party retirement planning group) incrementally added to the knowledge base. I took courses given for accountants and actuarial personnel.
It’s taken 35 years; the result of ‘being taken advantage of’ initiated the momentum for learning to take charge of my own finances. And in this long run (experience), I am far better off than if I had simply made a small amount of money in the beginning and never truly learned how to do it myself.
One of the biggest secret to success is never to go with predictions, as they can kill us easily, it is fairly important that we focus on proper ways instead of shot cuts and predictions, as that’s the only way we will be gaining success. Right now I am working with OctaFX broker where I get a lot of benefit that keeps me settled with things especially with their daily market analysis facility it is really first class and helps me a lot in every manner.ReplyDelete
In todays, fast past economy, internal prediction markets are working better than expected. The reason for this significant success, is because there is a learning by doing or from past bidding experiences in this markets.ReplyDelete
Researchers, Cogill and Zitewitz state:
“The inefficiencies that do exist generally become smaller over time. More experienced traders and those with higher past performance trade against the identified inefficiencies, suggesting that the markets’ efficiency improves because traders gain experience and less skilled traders exit the market.”
My mother, always tells me that “experience is the best teacher”, and I found this to be true throughout my professional career. However this philosophy can be used in every aspect of your life. For example, as a business owner, through my past experiences I have learned what makes my long-run costs stable. Knowing this, I am able to either increase or decrease earnings in order to make better future predictions for my business. This is also known as a learning curve.
When it comes to learning curves, Authors, Froeb, McCann, Shor, and Ward states “As you produce more, you learn from the experience, and this experience helps you produce future units at a lower cost. Learning curves mean that current production lowers future cost, which has important strategic consequences. Here the maximum “Look ahead n reason back” is particularly important.
This is the number one reason why the prediction markets are better than we expected.