Prediction markets were being tipped as a fantastic new way to forecast everything from the completion date of a vital project to a firm’s annual sales. But although they have spread beyond early-adopting companies in the technology industry, they have still not become mainstream management tools.
Even fervent advocates admit much remains to be done to convince sceptical managers of their value. "It's still a pretty evangelical business," says Leslie Fine of CrowdCast, one of the firms that provide trading platforms for companies keen to pool the collective wisdom of their employees.
Prediction markets work by giving people virtual trading accounts that allow them to buy and sell "shares" that correspond to a particular outcome. Shares in an outcome that is considered more likely to occur then trade at a higher price than those that represent a less likely outcome. This provides a way to tap into the tacit knowledge that exists in companies, especially ones that have many different divisions or offices.
Koch Industries, an American conglomerate in a range of businesses including chemicals, fertilisers and commodity trading, has been running prediction markets for the past nine months involving about 200 of its staff from different areas. The group, which has revenues of some $100 billion, has launched contracts on, among other things, the future prices of raw materials used in its chemicals division and the likelihood of bank nationalisations. Koch says the results so far have been pretty accurate compared to actual outcomes, but stresses that markets are complementary to other forecasting techniques, not a substitute for them.