Predict This! Why Prediction Markets Aren't Ready for Prime Time

Last Updated Jan 16, 2008 8:59 AM EST

My headline suggests prediction markets aren't ready, but actually they can be very effective ways to guesstimate outcomes on everything from new product sales to the weekend box office for the newest Johnny Depp flick.

No, the problem is with how companies use them. Culturally, most companies are not ready to use them effectively, says management soothsayer Thomas Davenport.

Prediction markets essentially invoke the "wisdom of crowds" concept. The market part comes in because many of these are run like a market, with the hundreds or thousands of participants "buying" shares in a particular outcome they believe will happen.

For example, your company might ask you to enter a prediction market projecting first-year sales of its new seven-blade razor. You might buy 50 shares in an outcome that says more than $100 million, and 25 shares in other outcomes. By watching where the market puts its money, company execs can plot where crowd opinion is coalescing.

But what if you are the product manager for said razor? Davenport thinks this is where the rub against prediction markets begins.

"Let's say that the employees who participate predict much lower sales than, say, the product manager for the new product, the division president, and the CEO. The fact that the crowd may be more accurate is not the point, or at least not the only point. The crowd has made the hierarchy look bad, and the hierarchy doesn't generally like to look bad."
So it will be a rare company that has the right culture fit to make prediction markets work, he continues. The culture would have to value the intelligence of its employees and be willing to act on what the market predicts. Google, he says, has the right cultural attributes, but most companies don't.

Let's start a prediction market on the future of prediction markets in corporate life. Where would you put your virtual money?

  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.