How Prediction Markets Ensure Better Forecasting


A Prediction Market is a technology-enabled way to tap and synthesize the inspired hunches and informed guesses of a vast audience for better forecasting.

THINK TOGETHER_How Prediction Markets Ensure Better Forecasting_LelandRussell.com

“Forecasting” is a process that helps leaders deal with the uncertainties of the future. The problem with traditional approaches — analyzing past data and current trends — is that they depend upon the assumptions of the forecasters (based on their past experience, knowledge, and judgment). But the past and the present does not equal the future.

Case in point. In 1903, the Mercedes Corporation, which manufactured the famed Mercedes Benz automobile, wanted to know the limits of the marketplace for automobiles. So they commissioned a study that concluded that, worldwide, there never would be a market for more than one million automobiles. The study’s underlying assumption? There would never be more than one million people trainable as chauffeurs.

Origins of the Forecasting Business

In ancient Greece, the city of Delphi was considered to be the center of the world. It was also the home of the Oracle of Apollo, which dominated the forecasting industry of that period. Supplicants flocked to the Oracle at Delphi for predictions, traveling not only from other parts of Greece, but also from Egypt, Asia Minor, and Italy.Origins of the Forecasting Business_Oracle at Delphi_LelandRussell.com

The origins of the Oracle are murky, but legend has it that it all began when a goat shepherd named Kouretas found a fissure on the slopes of Mount Parnassus. There were strange vapors emanating from the fissure and the goats grazing nearby were behaving oddly.  As word of this discovery spread, others came to investigate the phenomenon.  When they came into contact with the vapors, they entered a state of ecstasy and began uttering prophecies.

Unfortunately, a few of the curious got carried away and killed themselves by jumping into the chasm. This alarmed the local authorities, so they decided to take over the site and impose some order on its use. They appointed a woman to serve as the official clairvoyant (aka, “The Oracle”).

As a security measure, a tripod was rigged over the opening in the earth. Later more permanent structures were erected around the site: a shrine to the Earth goddess, a house for the Oracle, and so on. The great Temple of Apollo was the heart of the site, which also contained the purifying water of the Kastalian Fountain and the Navel of the Earth.

The Origins of FORECASTING as a business_The Oracle at Delphi_LelandRussell.com

The prediction experience was wrapped in ritual. On scheduled prophecy days, an unlucky goat was sacrificed on an altar just outside of the Temple of Apollo, and its entrails were examined. If the results were favorable, the Oracle would predict that day, dressed in full ceremonial robes, chewing a laurel leaf and inhaling the foul-smelling vapors emitted from the chasm.

The supplicants had a much easier job.  All they had to do was write down their question and then descend into the smoky enclosure of the Oracle. There one of the Oracle’s assistants would accept the question and ask the supplicant to wait in a corner until the Oracle divined an answer.

All of this was good news for the local economy. It boomed because of the numbers of people making the pilgrimage to the Oracle. Government revenues were strong because supplicants were required to pay a prediction tax, the “telono” fee.

The people living in the vicinity, about a thousand, earned their livings by selling sacrifices (boars, goats, and bulls) and religious objects. They also provided support services, such as servanting and inscription carving.

The Oracle of Apollo was world famous. If a Senator from Athens needed a prediction, no problem. He knew right where to go: Delphi.

First-Rate Forecasting, But One Problem

Everyone agreed that the Oracle at Delphi was first-rate, but there was one problem. The Oracle’s forecasting tended to be ambiguous and easily misinterpreted. In some instances, this caused major problems for the supplicant.

Take, for example, what happened to Croesus, the king of Lydia. In 550 BCE, he consulted the Oracle about invading the Persian Empire.  Because he was very rich, he was charged a very substantial consulting fee: 300 head of cattle, 117 bricks of gold and silver, as well as jewels, statues, and a gold bowl weighing a quarter of a ton.

Given what he had paid, Croeus expected an accurate answer to this question, “Should I attack Persia?”

The Oracle’s prediction was, “If he crosses a river, Croesus will destroy a great empire.” Having an imperial ego, Croesus assumed that this meant he would destroy the Persian Empire. But his attack failed, and the Persians then invaded and conquered Lydia. It turned out that the empire Croesus destroyed was his own. The Oracle, of course, maintained that the prophecy had been correct.

The Forecasting Folly Continues

Prediction is very difficult, especially if it's about the future_Neils Bohr

Like the Oracle at Delphi, esteemed individuals are notoriously inept at forecasting the likelihood of future events. Before we look at how leaders can significantly improve business forecasting (by tapping Collective Intelligence with Prediction Markets), let’s look at ten pretentious predictions that were collected by BuzzFeed.

  • “Rail travel at high speed is not possible, because passengers, unable to breathe, would die of asphyxia,” ~ Dr. Dionysys Larder, science writer and academic, in 1828
  • “The horse is here to stay but the automobile is only a novelty.” ~ The president of the Michigan Savings Bank advising Henry Ford’s lawyer, Horace Rackham, not to invest in the Ford Motor Company, 1903
  • “Stock prices have reached what looks like a permanently high plateau.” ~ Economist Irving Fisher in October 1929, three days before the stock market crash that triggered the Great Depression
  • “A rocket will never leave the earth’s atmosphere.” ~ New York Times, 1936
  • “Rock n’Roll? It will be gone by June.” ~ Variety magazine, 1955
  • ‘The Beatles have no future in show business.” ~ A Decca Records executive following a 1962 audition.
  • Remote shopping, while entirely feasible, will flop.” ~ Time magazine, 1968
  • “The internet will go spectacularly supernova and in 1996 catastrophically collapse.” ~ Robert Metcalfe, inventor of Ethernet, in InfoWorld magazine, December 1995.
  • “Y2K is a crisis without precedent in human history.” ~ Byte magazine editor Edmund DeJesus, 1998
  • There’s no chance that the iPhone is going to get any significant market share. No chance.” ~ Microsoft CEO Steve Ballmer, 2000

Better Forecasting with Prediction Markets

Obviously, it’s best not to rely on any one individual’s forecasting abilities, no matter their credentials. A far better approach for forecasting is known as a Prediction Market. This is a technology-enabled way to tap and synthesize the inspired hunches and informed guesses of a vast audience

FORETHOUGHT_Prediction Markets_lelandrussell.com

For example, PredictIt is a political prediction market established by Victoria University of Wellington. Their purpose is to research the way markets can forecast future. It’s actually a “real money” approach that tests your knowledge of political and financial events by letting you make and trade predictions on the future.

Why should an artificial Prediction Market have more credibility than, say, the pronouncements of a legendary CEO?

In his book, The Wisdom of Crowds, James Surowiecki answers that question. Large, diverse groups collectively are far better at predictions than individuals, with one major caveat. The predicting group must be diverse, individuals must make their predictions independently, and the individuals must have decentralized information sources (“local” knowledge).

How Leading-edge Organizations Use Prediction Markets

Many organizations have used internal Prediction Markets to improve their decisions in a variety of areas. For years, Hewlett-Packard has this approach to fine-tune its sales campaigns. Best Buy’s “TagTrade” is an internal Prediction Market where rank-and-file employees buy or sell shares in proposed new products, giving management an early indication of which ideas should be most profitable.

Others who have employed this approach include Abbott Labs, Arcelor Mittal, Chrysler, Corning, Electronic Arts, Eli Lilly, Frito Lay, General Electric, Intel, InterContinental Hotels, Masterfoods, Microsoft, Motorola, Nokia, Pfizer, Qualcomm, and Siemens.

It not surprising that Google conducted one of the largest corporate experiments with Prediction Markets. Participants began with an endowment of artificial currency (called “Goobles”). They used this currency to “purchase securities” that paid off in Goobles if a specified event occurred. *Legally, Google employees were not actually trading securities as defined under securities laws in that they were not placing real money at risk.

According to its former chairman, “At Google, the role of the manager is that of an aggregator of viewpoints, not the dictator of decisions. Building a consensus sometimes takes longer, but always produces better decisions and a more committed team.”

How to Thrive in the New Normal: PREDICTION MARKETS

In the New Normal, you need best possible forecasting. An innovative solution is to create an internal Prediction Market — a technology-enabled way to tap and synthesize the inspired hunches and informed guesses of your whole organization.

Three additional “Prediction Market: question to consider:

  • In what area(s) is forecasting most important?
  • How effective is your current forecasting in these areas?
  • What could be the economic benefit of better forecasting?

Three additional “Think Together: articles:

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About Leland Russell

Leland Russell is the co-author of Winning In FastTime®, a highly-acclaimed book about leading strategic action. He delivers the best ways to strive and thrive in the New Normal, serving clients as a Strategic Advisor and Leadership Coach. GEO Group Strategic Services, the consulting firm Leland founded in 1991, has a stellar track record with Fortune 500 organizations, mid-size firms, and non-profits. GEO"s typical clients are leaders and mission-critical teams.

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