Wisdom of Crowds in Practice

A while back, I read (actually listened to) the Wisdom of Crowds by James Surowiecki. It was a great book with a lot of intriguing ideas. There’s a lot of evidence to suggest that a large group of people, most of whom are NOT experts in a field, are more accurate or correct than individual experts when the crowd’s predictions are taken in aggregate. If you enjoyed Tipping Point or Freakonomics, you’ll probably enjoy the book.

 

Recently, there have been a few articles about companies that are using “prediction markets” to help predict successful products, financial results, and so on. The idea is that if a large cross-section of a company is asked to predict quarterly sales, that group is often more accurate than asking the small handful of people at the top of the sales organization. Similarly, a large group of people responsible for designing, building, marketing and shipping a product will often better predict the market adoption of the product than the product’s management team.

 

One example of a prediction market is the Iowa Electronic Markets (profiled in the book), which over the last several years has been very successful at predicting election outcomes. It’s used as a teaching tool at the University of Iowa, but is open to anyone who wishes to participate. A “trading account” can be opened for as little as $5 (and up to $500) and my understanding is that the presence of “real money” forces participants to evaluate their decisions more carefully than if their accounts just contained “points.”

 

And just within the last few days, I’ve learned of a couple of new sites that are taking this effect out to the consumer. One of them is Inkling, whose business is to “host” private prediction markets for companies, as well as public culture/sports/politics markets that appeal to the geeks and wonks crowd. Some example public markets include “Who will win the NL Wild Card race?” (the high stock here is currently for the Dodgers), “Will Apple’s stock price be above $85 on 1/15/2007?” (61% likely), and “When will Microsoft ship Windows Vista?” (Jan 2007 remains the favorite). You can get a free account and buy/sell these “stocks” on your own.

 

Another example is PicksPal, which does roughly the same thing but focuses exclusively on sports. They watch the various Vegas/online sportsbooks to see where the odds are and then you (with a free account) can buy/sell shares in the results (in points). The cool thing here is that it goes beyond the typical win/loss and over/under predictions. You can buy stock in “prop” bets such as “When Virginia plays Georgia Tech, will any defensive player have 2 or more interceptions in the game?” If you think it’ll happen, you buy stock and get paid back stock as a result. With that prop bet, you’d get paid 8 points for every 1 point bet.

 

Neither PicksPal or Inkling costs anything to join and neither provides gambling of any real money. You’re simply predicting an outcome and comparing your individual result to that of the overall community’s “group prediction”.

 

As I started this post, I found several other examples that may be worth checking out, including CrowdIQOwise, and Smarkets.

 

Oh, and Go Newcastle (25/4 over Liverpool on PicksPal)!