Still looking for the roots of the concept, I found a paper on an experiment at Google in what the economists called “information aggregation and revelation.” That was getting closer. This paper gives a number of interesting applications of prediction markets. One I thought was particularly interesting was the Iowa Electronic Markets, a University of Iowa project that conducts markets on elections as well as business topics like interest rates and corporate earnings. There’s lots of information on the site and you can register to participate if you like. Quoting another study, the Google paper comments that, “In the political domain, Berg, Forsythe, Nelson and Reitz (2001)summarize the evidence from the Iowa Electronic Markets, documenting that the market has both yielded very accurate predictions and also outperformed largescale polling organizations.” See pages 6 through 10 for their discussion of the accuracy of prediction markets. It’s impressive and certainly argues for “the wisdom of crowds.”
The authoritative article in the general media is a New York Times piece from this
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There are other fascinating examples in the NYT article, worth reading in its entirety. Prediction markets is not a new idea. However, it is one that seems to have been facilitated by Web 2.0 software tools. It’s not news to any of us that the pace of change has speeded up and we need to tap all possible sources of innovation. Prediction markets represent one way to speed successful innovations to market.
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