Executives, Prediction Markets, and Wall Street

Prediction market fans can chalk up yet another story in a mainstream publication likely to catch the attention of C-level executives: 'Betting the Ranch on Your Company' in the CFO Magazine issue dated March 6th. It's a reasonably thorough and intelligent treatment (save for a quibble about true versus perceived probability), however the examples will be largely familiar to those who've been following this space for more than the last few months. The author is unfortunately over-reliant on a single source with an agenda (albeit a very well-informed one who happens - in our opinion - to be right): Mike Knesevitch of Intrade's parent Trade Exchange Network.

...some contracts aren't as accurate as others—particularly those that hinge on court cases in which cameras aren't present... prediction markets might... provide a venue for useful corporate decision-making... the judgments of a group of bettors within a company itself can supply useful information on business operations that lack systematic ways of culling data... Wisdom gleaned from employees in such ways can temper executive decisions. [emphasis added]

...which is exactly why some executives fear and/or marginalize prediction markets and why despite the track record and the enormous number of potential applications of prediction markets in business decision-making, they've enjoyed only moderate, creeping success to date. One does not claw one's way up the corporate ladder and struggle to get one's face on the cover of Forbes only to have one's decisions 'tempered'... unless one is smart and forward-thinking and secure in knowing that the wisdom of the many will trump the wisdom of the very few more often than not (though not always).

Telling the difference is the tricky part.

What C-level executives choose to do with the information that keeps coming out about prediction markets in major publication is dependent to a large degree on things that have nothing whatsoever to do with the accuracy of the markets themselves, e.g.:

• how congruent is the organizational structure and decision-making process with the forces and yearnings that prediction markets inevitably unleash? (flat, fast and democratic? or hierarchical, slow and autocratic?)
• how secure do executives feel in their role(s) as facilitators and empowerers? (as opposed to being the smartest and best informed in every situation)
   
  
• how (and how well) does information flow through the organization today? (are cross-boundary exchanges encouraged? or are silos and secret-keeping behaviors implicitly rewarded?)
• how are heretics, truth-tellers, gadflies and other critics of conventional wisdom utilized (or 'dealt with') inside the confines of a particular corporate culture?

It should also be noted that the success of prediction markets in business has been restricted, for the most part, to a handful of truly enlightened companies known for management innovation and experimentation with second-generation knowledge management. Yet even there, we know of none that has yet adopted them wholesale. (One large client has told us they're explicitly laying the groundwork to make that possible but hasn't quite gotten there yet.) Whether the next few years are a time of true market-adoptive chasm-crossing for prediction markets, or a time of continued dribs and drabs of ad hoc experimentation (amidst wider and wider awareness) is anyone's guess.

One thing that is worth getting excited about is a potential correction that prediction markets might achieve to the longtime myth of securities analyst independence - something which could catapult them into the 'hot' bin (i.e., "do something about this now") of top executives at virtually every publicly traded company.

Intrade is also about to list a contract that depends on the likelihood of a downgrade, a restructuring, a technical default, or missing payments at one prominent, if wobbling, corporation.

The practice of mutual hand-washing among Wall Street traders, deal-makers and analysts whose paychecks all come from the same place has been barely band-aided over in recent years by conflict of interest regulations, changes to explicit bonus incentives, organizational firewalls and a trickle of independent competition. Barely. We've seen it from inside. The system was very ugly. It is slightly less ugly now. By contrast, the advent of public prediction markets to corporate financial analysis would be like a busload of supermodels storming into town - a shot of independent truth and beauty and information that could drive them into widespread corporate-internal applications almost overnight. Interesting times...