Mapping Strategy

Obstacles to Prediction Market Adoption

Harvard Business School Associate Professor Andrew McAfee asks, in a recent blog post, why prediction markets haven't been taken up more readily in the corporate world. He writes [links added]:

After writing the [Google prediction markets] case, teaching it a few times, and spending some time understanding the mechanics and utility of prediction markets, I share the puzzlement articulated by James Surowiecki in his book The Wisdom of Crowds:

". . . the most mystifying thing about [prediction] markets is how little interest corporate America has shown in them... companies have remained, for the most part, indifferent to this source of potentially excellent information, and have been surprisingly unwilling to improve their decision making by tapping into the collective wisdom of their employees."

Why is this? It’s not because the technology is hard to acquire... what is the real stumbling block? Is it that companies don’t really want the most accurate information about future events to come out and be widely known?

Sean Silverstone Silverthorne, the editor of HBS Working Knowledge expands on the question in a post last week, outlining what he sees as "three initial roadblocks":

• Unfamiliar with the Concept -- Most managers, especially the veterans, grew up hearing not to trust crowds, to avoid mob rule. Instead, they were encouraged to value expertise and be ready to pay consultants. It’s a major brain-bender to suddenly believe crowds can be smarter than experts.
• Internal Friction -- Corporate prediction markets rankle folks like product managers when company employees start betting on a bad outcome for their product.
  
  
• Implementation Issues -- Until recently, there wasn’t a whole lot of best practices around how to run efficient prediction markets. Results can be seriously skewed by having too few participants, asking the wrong type of questions, or by running a market too long or too short a time.

From my experience working directly with prediction market vendors and corporate implementers, and having watched, thought about and pontificated on this phenomenon for over a dozen* years, Silverstone's points seem reasonable as high-level headings. Several caveats and elaborations may be useful on this rapidly-moving target, however. *(I first heard about them in a pitch by Ken Kittlitz to the Digital Commerce Society of Boston circa 1995/96 -- shortly after I nominally helped co-found that late and loosely constructed organization, and shortly after Kittlitz founded the Foresight Exchange)

First, the number of managers completely unfamiliar with the concept of prediction markets has dwindled markedly over the past five years -- and at an accelerating rate. Silverstone is, I'm sorry to say, somewhat behind in writing that:

A relatively small number of companies including Google, HP, Intel, Yahoo, and Eli Lilly have jumped on this idea by creating prediction markets to aggregate the opinions of employees...

That was true five years ago. It is not the case today.

Doing some research into this recently, I was pleasantly startled to discover that there are at least fifty large corporations running prediction markets 'for real' now, and countless others running small, informal and for the most part un-trackable pilots. (Virtually all of the major vendors offer such trials, though with varying degrees of publicity and enthusiasm as well as varying degrees of ease in setting them up -- though none are terribly difficult). And that's not counting the number of academic institutions and news media organizations that run prediction markets for other reasons (e.g., experimental learning and securing reader attention, respectively).

Add to that the fact that HBS and HBR are covering this topic, conferring a halo of corporate legitimacy, that Surowiecki's book continues to thrust the key concepts into business management if not lay-public consciousness, that barely a week goes by without a major publication giving some ink to the subject (I've stopped even blogging them individually, there are so many) and that the proportion of people in the management class who trade various financial instruments is very high. I.e., they recognize, at some level, that prices represent crowd wisdom -- a body of information to which they may or may not be privy, but which they ignore at the peril of their 401K.

So, given that backdrop, I would turn Silverstone's point around and ask: What excuse can a manager offer, in May, 2008, for being totally 'unfamiliar with the concept' of prediction markets?

Wait. Don't answer that. If your boss isn't reading this, your CEO or your board very well may be, and that's not an idle quip. Some of the most important prediction market initiatives I've seen have come down from the very top, rather than from middle management...

...which leads me to Silverstone's second point: "Internal Friction". That would be putting it mildly.

Some cultures palpably chafe at the idea of unleashing democratic forces within their walls. This is not a scintillatingly deep or novel insight. We know this to be true for countries, and families, as well as for bowling leagues and PTOs for that matter. (I've also observed this when running scenario workshops within certain corporate and, treading lightly here, societal cultures).

Humans almost universally seek some kind of power or at least stability. They work hard for it. And they're loathe to give it up to some impersonal, anonymous and (it can sometimes appear) fickle and BS-penetrating tool (however powerful) that doesn't even have to justify its reasons. (Imagine an election in which each voter had to justify his or her reasons -- to someone -- before casting a vote and you'll understand what I mean.)

Which is all to say that the issue goes well beyond friction to questions of culture, organizational structure, leadership, and the role or perceived role of middle managers. Classically the role of 'middle management' (even the term has taken on a derogatory ring) has been to act as filters and conveyors of information moving between senior management and workers.

Prediction markets usurp some of that role and that can be, quite understandably, unsettling to them. Nobody ever said business was fair. But, bottom line: it is a real reason why prediction markets need to be contextualized carefully in order to succeed. Repeat after me: it's not about the software (mostly).

Which brings me to Silverstone's last point: Implementation Issues. Let's be clear about one thing: 'implementation' here does not refer to the kind of thing one thinks about when installing a big new software system. The software for these things is pretty darned simple in that regard.

The much bigger questions have to do with organizational issues. And those can be sweeping.

For example:

What questions is an organization, a) truly interested in knowing the answer to (strategic), b) willing to tell the employees they might not know the answer to (potentially humiliating) and, c) willing to feed back information on how and why we did or did not act on that input (empowering of morale and loyalty... or cynicism... depending on how it is handled). Just the first part of that is a big, hairy strategy question that goes right to the heart of what a company wants to be when it grows up and where it thinks it is currently 'stuck'.

Bottom line: prediction markets harbor all the paradigm-changing, employee-empowering breakthrough-idea-generating, process-improving, cost-saving potential of the suggestion box... as well as all of its potential as a reason to deride management.

Here are the twists that can and do cause managers to think carefully about the transparency they're prepared to unleash: prediction markets are real-time, they're at least nominally public, and the information they generate isn't really a suggestion (casual) so much as it is a serious investment of time, thought and expectation on the part of those asked to participate. One has to ask then: With all of that potential for discomfort, why have so many big companies begun using them in earnest?

LinkedIn... to Twinkies?

Fascinating piece by Nicholas A. Christakis (Professor at Harvard Medical School) over at edge.org on the impacts and dynamics of social networks:

...it turns out that all kinds of things, many of them quite unexpected, can flow through social networks, and this process obeys certain rules we are seeking to discover.  We’ve been investigating the spread of obesity through a network, the spread of smoking cessation through a network, the spread of happiness through a network, the spread of loneliness through a network, the spread of altruism through a network.  And we have been thinking about these kinds of things while also keeping an eye on the fact that networks do not just arise from nothing or for nothing.  Very interesting rules determine their structure. 

UPDATE: Taking a somewhat more serious tack than my snarky, early-morning title would suggest is friend and colleague Patti Anklam over at her blog, 'Networks, Complexity and Relatedness'. (She actually specializes in this stuff and can speak with authority on it). She writes:

This work is truly boundary-crossing... His research indicates that it's the norms that are most influential because, as he says, "they can fly through the ether" whereas for behaviors to propagate we need to be physically together. He echoes many of the themes I've developed in my book (Net Work): one of the the things that I have been saying for years is that the key distinction of this 3rd generation of knowledge management is that knowledge is in the network. (In generation 1, we assumed knowledge was in artifacts; in generation 2 it was in people.) Christakis comes to the same conclusion...

Thinker or Tinker - In Pursuit of Practical Strategy

My Tuesday post ('sdrawkcaB gniknihT...', aka 'Thinking Backwards') drew this response from Dave Snowden over at Cognitive Edge. First, mea culpa for a poor choice of words in referring to author and colleague Patti Anklam whom I hold in the highest regard. On to Dave's stuff. He writes (I'm excerpting what I take to be the espresso-essence here):

1) Future Backwards [an approach he developed] is not an alternative to Scenario Planning [generic], [but] is one of a body of techniques designed to handle the issue of managing uncertain complex environments...

2) Threats and opportunities in a complex domain are unlikely to be anticipated...

3) Discussion in groups, no matter how done, constrains possibilities to our imagined present and perceivable futures. That constraint prevents us detecting weak signals or sensing different potentialities.

I'm in near-total agreement on each point:

• narratives and scenarios are complementary,
• one can never adequately anticipate the unprecedented (resilience is a far better stance) and
• groups (as well as individuals) can be remarkably sheep-like.

Here's where I suspect Dave and I are probably seeing/touching different parts of the elephant (not the unspeakable one in the living room, but rather the one in the Indian parable):

Workshop processes, especially if they are reductionist - modular piece parts [my term] implies this - will always tend the accept the dominant culture of the group, or that of the facilitation team. The field of strategy needs research and planning processes which minimise the footprint of the strategist; they also require minimising the influence of the facilitator. Focusing on participation and inclusiveness runs a very high danger of group think and consensus - exactly the opposite of what is needed under conditions of uncertainty. The role of the scenario planning consultant is not to make people comfortable, the opposite in fact. There is no point to going to great lengths to prevent the dominant Mr Smith to use Mapping Strategy's example, if the facilitator then orchestrates the assembly. Now I assume that s/he has a way of avoiding this, although I am not sure it can ever fully be escaped. In many of the scenario planning processes I have observed the facilitator in effect strongly influences the group direction.

There's more here than I can easily address in one post. One important point Dave raises is the role of the strategist/facilitator. The classic 'pure facilitator' model is much like the classic journalistic, psychiatric or pastoral ethic: one must enter an almost Zen-like zone, dispensing with (or at least setting aside) biases and assumptions in order to draw out the best input from others. Nice ideal. I buy it--to a point. Only problem: we're all human. Better to clarify, understand and declare one's biases--and let others do the same. Call it the ethic of the blogosphere: an incredibly wide range of authentic and thoroughly biased voices get heard. Nobody can say that he or she is above it all.

I'll hit a few other points via a rough analogy aimed at teasing apart the differences between narrative and scenario techniques. (I'll stick with generic terms for each method for now; other posts outline how we each believe our versions are special.) Warning: this analogy deliberately exaggerates the differences for clarity.

Developing strategy is akin to crafting a three-dimensional object out of wood. I'm consciously avoiding terms such as 'sculpture', 'model', 'artwork', 'contraption' or 'prototype' (much less 'house' or 'book') since each carries with it a set of constraints and requirements that beg a more limited set of methods. There's a time and a place for 'blank-sheet' brainstorming and sense-making out of virtually nothing (analogized at left in the elegant carved-wood 'thinker' sculpture) and a different set of conditions under which discrete representational languages are better for groups to compare, contrast and converse about a more limited set of possibilities (analogized at right in Tinker Toys).

If one's starting material is a completely raw block of wood (i.e., the cognitive vastness of wide-open  assumption-free strategy 'space') and modularity, replicability and speed are lesser priorities, then the highly refined figure at left is clearly the most useful way to think about developing strategy--and the one I'd want on my mantelpiece. Not all strategy problems are that unbounded.

If on the other hand, some basic assumptions can be reasonably made (and others dispensed with) via some front-end interviews, research, listening, narrative, analogizing and sense-making, then a rapid prototyping approach to future possibilities using modular piece-parts can enable a far greater range of strategic innovation.

This is counter-intuitive.

Other analogies may be helpful. In industry after industry (automobiles, eyeglasses, computers, software, housing, music, etc...)--and professional services are no exception: e.g., legal advice, accounting, software coding and even strategy consulting--it was once thought that every creation needed to be a 'one-off', developed from scratch to unique specifications. The results could often be near-perfection, but at a high cost. Re-configuration and plug-and-play innovation were virtually impossible.

In each case, modularization, interoperability and standardization led to a flowering of creative possibility in combining those parts. Counter-intuitive. The carved figure seems more special somehow--and it is... in one dimension (call it artistic elegance). Only a few elite folk can create such things. They cannot do it quickly. Less overall variation. Less overall innovation. Less ability to involve the people who have to live and breathe and implement the strategy.

Again, I exaggerate to tease out the differences, not to slam Dave's approach which I do not claim to fully understand. Each has its place.

The broad goals of strategy in virtually any case and with any method are to end up with something differentiable (distinct from competitors, innovative in customers' eyes and if possible not easily copied), explanatory (symbolically representing something far more complex while helping people to comprehend it), resilient (i.e., adaptable to new information, insights and changing conditions) and easily shared (i.e., enabling good ideas to be translated into common and widespread 'gut' understanding, buy-in and action)--not necessarily in that order. It strikes me that narrative methods may do better on the former two points; scenarios on the latter.

Narrative work is not all elitist fine art; scenarios are hardly flimsy children's toys (nor is the opposite true)... and all analogies and superlatives are dangerous.  ;-)

What modular, interactive scenarios do (and paleo-scenarios do far less well) is to define discrete if somewhat arbitrary points in the vastness of strategy 'space' in order to facilitate dialogue and easy recombination. Managers and executives can converse and 'play' far more easily and efficiently with discrete events ("More iPods than TVs: 2010") than they can with abstract concepts. This is the essence of resilient strategy or 'strategy-on-the-fly' (it's always evolving, never 'done'). People can express opinions about discrete evets in terms that more clearly surface differences of opinion and facilitate cognitive map-making (e.g., 'likely'/'unlikely', 'necessary'/'irrelevant', etc.)

When we do scenarios, the modular piece-parts form the basis for a common strategy language that helps groups to converse and make sense of an otherwise unmanageable set of possibilities. Narrative (in its loosest sense--i.e., people talking in stories--and not to be confused with Dave's method in particular) is a great front-end to scenarios, helping to expand and add color, definition and boundaries to a pioneerable space that's otherwise just a raw block of wood.

sdrawkcaB gniknihT - Mind Game or Creative Lever?

Related to my post yesterday about simulated hindsight, this Times of London article notes the value not only of working from a given end-point, but of actually 'telling' a story in reverse.

E.g., the firemen drove away, they packed up their gear, they put out the blaze, they broke down the door, they arrived on the scene, the mother called 911, the boy fled from his room, he screamed, his hair caught fire, he was playing with matches, he stole some matches from his father's desk drawer.

It's not easy to follow--or tell. That's the point in some contexts. Police have found it useful in attempting to catch a suspect in a lie.

Traditional police interview methods were used in the study, and in those that employed the reverse order tactics – described as “cognitive load interviews” – the interviewer asked the suspects to recall a series of events from the most recent backwards.

Officers were less likely to detect the liars when traditional methods were used in the interviews but were more likely to detect lies when the subjects were asked them to recall events in a reverse order.

It's analogous to something good proofreaders know well: spelling errors are easier to catch when one reads backwards. I was tipped off to the Times piece by innovative UK-based consultant Dave Snowden, over at Cognitive Edge. (H/T: Bob Weber) Snowden favors the backwards-telling approach because:

...by getting people to construct history in reverse... they explored more possibilities and were more open to novel discovery

That's all to the good. Snowden seems to position narrative as an improvement on scenario planning however. That's a bit hasty and sweeping.

...if you have strong opinions about what should happen, then it is easy to influence the evolution of a scenario that will support your proposed actions. Its also easy to describe how the past led to the present in such a way as to vindicate your view of history... I drew the ideas [for narrative] from various readings in the cognitive sciences which indicated that reverse time flow was harder, and disrupted what would otherwise be entrained processes. [link and emphasis added]

It's true that traditional (non-modular, non-interactive), 1970's/'Shell-style' scenario planning is particularly vulnerable to influence by strong personalities with political motives and rigid views. Any process can be steered by someone in power uncomfortable with open-ended 'novel discovery' who makes it clear to subordinates and unscrupulous consultants that there's a "right" and a "wrong" answer to the process s/he is paying for. A centralized process is 'breakable' with concerted, centralized influence. Practically every client we work with has taken us aside at some point to warn us of this in one form or another:

Before we get going, you need to know about Mr. Smith, the head of our XYZ division. If he ever gets the floor, he will kill this. Everyone will be forced to go along with his ideas. He's a smart and he'll twist this. He's a bully and a blowhard and he's got the influence to bend people to his will and make this come out his way. Watch out.

And every time, Mr. Smith (and it's usually a 'Mr.') finds himself--in our meeting--in a situation where his personal air-time is far more constrained than he's used to and his contributions are on par with everyone else. Looking for an opportunity to drive the outcome, he instead finds himself sorting through modular scenario piece-parts, unable to know in advance how the collective intelligence of 20-40 people will render them all into an interlocking scenario map.

When scenarios are built in a more distributed fashion from modular piece-parts in the context of a highly interactive, participatory, fast-moving, tightly choreographed session however, any one person's ability to steer becomes minimal. The process is democratizing, taking advantage of emergent 'wisdom of crowds' effects that nobody can see, much less steer until the end when the whole picture is developed. Some hierarchical, top-down cultures (both corporate and national) don't like our process for precisely that reason.

Story-telling is only part of it and teams will often independently elect to build a scenario story in reverse--quite possibly for the reasons Snowden suggests. His process--to my knowledge--takes advantage of similar dynamics. My contrast here is not with narrative but with traditional ('paleo-') scenarios--the kind most people are familiar with.

I've made the analogy before that traditional scenario methods are to mainframe computers as modular, interactive scenarios are to PC networks. It's not perfect, but it holds up for 'hacking' and influence as well: a network of independent actors tasked with constructing a scenario 'map' is far more resilient than a monolithic (e.g., top-down) process.

Markets make for an even better analogy (one of the reasons I continue to link them with modular scenarios). Broadly-based, highly liquid markets (including PMs) are less subject to influence than monopolies/oligopolies (one/few sellers) and monopsonies/oligopsonies (one/few buyers)  .

I don't know Snowden's process intimately, but I've been through some interesting demonstrations by one of his acolytes professional colleagues, Patti Anklam, whom I hold in high regard. Her main website can be found here. [italicized stuff added] Fascinating stuff. Powerful. And different from scenarios. Hardly a substitute for them (or vice versa!). I see two major distinctions:

1. Reverse-order storytelling, because of its "high cognitive load" (my brain hurts!), favors those with greater ability to bear such a load and/or greater experience using the technique. In other words: the same executives liable to steer any process, as well as (sometimes) the consultants. Requiring such an approach may to put a damper on inclusiveness and equal participation. Great for police questioning and trying to trip up a suspect; not necessarily so great when trying to build a team and gain their enthisiastic buy-in to a common vision.
2. The novelty-seeking open-endedness that narratives tend to produce can be just the opposite of what some organizations need. When the problem is completely unbounded (little data; near-infinite possibility; minimal understanding), scenarios are of little use and narrative may be most appropriate. When the problem is more about finding distinct points of divergence and convergence between several "schools of thought" (some data, numerous but not infinite possibilities, modest understanding) then scenarios tend to be more appropriate.

WaPo Misguided on 'Experts' vs. the Swarm

H/T to reader 'AT' for this WaPo piece purporting to have discovered a new Internet phenomenon. Unfortunately, it reads more like a lightly buttered press release gushing with premature praise and hope for the firms featured in it than a serious examination of the competing philosophies of finding correct answers and discerning the outcome of future events.

The article takes the academically and empirically well-proven notion of collective intelligence (aka the wisdom of crowds), and presumptively twists it into the more comforting and familiar (if statistically invalid) notion that "father-knows-best"--only we haven't done a good enough job of finding the right "father" up until now.

...a small number of Web sites [are] seeking to turn the wisdom of the Internet on its head by sifting through its vast number of users to identify a handful of experts. If this novel approach withstands scrutiny, the reverberations could extend well beyond sports betting to include stock trading, popular culture and other realms.

For the past decade, much of the Internet has been animated by the "wisdom of crowds"; the notion that the tremendous masses drawn to the Web can together provide collective knowledge that outperforms even that of experts. By marshaling the knowledge and tastes of millions of people, the Web has fundamentally changed the way people can gain knowledge about their world...

But this wisdom of the crowd could be outsmarted by what Michael Arrington, editor of the TechCrunch blog, recently dubbed the "wisdom of the few." Sites like PicksPal rely on input from the masses chiefly as a venue for auditioning prospective experts, on the theory that these virtuosos could provide even more accurate information and predictions than the crowd.

"If you figure out which ones did the best and get rid of the ones who have no idea, you'd do even better. Distill it down to the people who really know," Arrington said.

While generations have looked to pundits for guidance, it has often taken a long time for their expertise to be recognized, and many have remained in obscurity. Now the Internet promises new ways to discover those who might otherwise get overlooked.

Prediction market stalwarts Justin Wolfers and Robin Hanson take the ideas to task--though readers would have to persist to near the end of the article to discover such criticisms (ironically from the experts whose opinions actually matter in this case.)

Wolfers... said collective wisdom... is more likely to be accurate than Web sites claiming to feature experts. Someone must have a track record stretching back decades before it is statistically possible to conclude whether success results from talent or random chance, he said. "Folks who look like experts today are very likely to be lucky," Wolfers said. "If they're conditioning it only on past history, it's likely to be a lost cause."

...Even if sites are able to identify expertise, several business professors questioned why experts would donate their wisdom to the Web rather than striking out on their own to make money. "If they're really consistent, it's kind of hard to see how the sites will survive. The experts will leave," said Robin Hanson, an economics professor at George Mason University.

What the article doesn't take space to note (but which I know Wolfers and Hanson know well) is that prediction markets do an even better job of rewarding experts because 1) they are able to increase their influence as a direct result of, and in proportion to the stupidity or inaccuracy of the dilettantes and 2) experts betting anonymously or pseodonymously can bring in information that they otherwise might be reluctant to offer under their own name.

Visualizing Complexity

As a huge fan of data-rich, insight-generating ways to represent complex phenomena (an appetite originally whetted by Yale prof Ed Tufte - see books on sidebar), I was blown away by this site. At the moment it contains 326 different 'maps' ranging from e-mail patterns at Enron to "the energy landscape for the folding of the beta3s peptide[s}"

Clear an hour and click around. The only word I can come up with is... fascinating.

Next Generation KM: Internal Market Engines for Innovation Selection

A big H/T to a reader and longtime colleague for this article in yesterday's NYT about internal prediction markets applied to the problem of innovation selection (the topic of a panel I chaired last year at the Conference Board's Innovation event in NYC):

"We're the founders, but we're far from the smartest people here," Mr. Lavoie, the chief executive, said during an interview at Rite-Solutions' headquarters outside Newport, R.I. "At most companies, especially technology companies, the most brilliant insights tend to come from people other than senior management. So we created a marketplace to harvest collective genius..."

According to Tim O'Reilly, the founder and chief executive of O'Reilly Media, the computer book publisher, and an evangelist for open source technologies, creativity is no longer about which companies have the most visionary executives, but who has the most compelling "architecture of participation." That is, which companies make it easy, interesting and rewarding for a wide range of contributors to offer ideas, solve problems and improve products?

...At Rite-Solutions, the architecture of participation is both businesslike and playful. Fifty-five stocks are listed on the company's internal market, which is called Mutual Fun. Each stock comes with a detailed description — called an expect-us, as opposed to a prospectus — and begins trading at a price of $10. Every employee gets $10,000 in "opinion money" to allocate among the offerings, and employees signal their enthusiasm by investing in a stock and, better yet, volunteering to work on the project. Volunteers share in the proceeds, in the form of real money, if the stock becomes a product or delivers savings...

Mr. Marino, 57, president of Rite-Solutions, says the market, which began in January 2005, has already paid big dividends. One of the earliest stocks (ticker symbol: VIEW) was a proposal to apply three-dimensional visualization technology, akin to video games, to help sailors and domestic-security personnel practice making decisions in emergency situations. Initially, Mr. Marino was unenthusiastic about the idea — "I'm not a joystick jockey" — but support among employees was overwhelming. Today, that product line, called Rite-View, accounts for 30 percent of total sales. "Would this have happened if it were just up to the guys at the top?" Mr. Marino asked. "Absolutely not. But we could not ignore the fact that so many people were rallying around the idea.

...one of the most valuable stocks on Mutual Fun is the stock market itself (symbol: STK). So many executives from other companies have asked to study the system that a team championed the idea of licensing it as a product — another unexpected opportunity. [emphasis added]

There are several things I find interesting here. The internal market delivered tangible financial results within just a few months and and generated immediate interest by others. As I've said for about a year now, prediction markets are poised for hockey-stick growth. They are no longer simply experimental or academic, nor are they of interest solely to Fortune 500 organizations whose right and left hands don't know what the other is doing. As interesting is the fact that the very innovation the market picked facilitates the rehearsal of complex, time-dependent decision-making - a topic I spoke about just last month at the Intelligence Summit. We are witnessing no less than a revolution - the simultaneous open-sourcing and simulation of management decision-making. The whole article is definitely worth a read.

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...

Google Outs Itself: Prediction Markets Used For Strategic Insight

Google announced yesterday on its blog that it is using, benefiting from and advancing the state of the art on prediction markets. (I particularly like the playful image they created to go with it.)

Building on the ideas of Friedrich Hayek and the Iowa Electronic Markets, a few Googlers... set up a predictive market system inside the company. The markets were designed to forecast product launch dates, new office openings, and many other things of strategic importance to Google. So far, more than a thousand Googlers have bid on 146 events in 43 different subject areas (no payment is required to play). We designed the market so that the price of an event should, in theory, reflect a consensus probability that the event will occur... our prices really do represent probabilities - very exciting! We also found that the market prices gave decisive, informative predictions in the sense that their predictive power increased as time passed and uncertainty was resolved.

Google joins over a dozen other prominent companies that have made similar announcements over the last few years. As the 'darling' company of the moment (many are watching and attempting to emulate their roaring success), this will have out-sized (positive) influence on the already rising credibility of prediction markets for mainstream business planning applications. The obvious next step - Google offering prediction markets as a service - could be massive. Watch this space. Either way, as I noted in July and then declared in August: "it seems warranted to declare this summer an inflection point for the phenomenon."

Hat tip to several on-the-ball readers.

When Being Right is Considered Mutinous

Robin Hanson has a couple of great posts over at Marginal Revolution today. The first asks why more people don't use the so-called 'wisdom of crowds' in making high-stakes personal decisions - as he did recently in selecting a topic for his next book:

When we make our biggest choices about careers or significant others, we rarely consult more than a few of our closest associates, and often not even them... No one I've talked to has heard of anyone doing anything similar.  Why?  I can think of two reasons:

1. Asking widely for advice is taken as a sign of weakness and ignorance. 
2. Asking someone for advice on an important decision is taken by them as a signal of intimacy; ask too many people and you are an advice "slut."

I'd put intimate relationship decisions in a different category altogether, but that aside, I suspect that for many there is also a sense of intrinsic intuitive 'rightness' about one's own default position such that it doesn't even cross one's mind to ask widely for advice. I.e., what could my second cousin possibly know about the latest arcana my professional decisions? Answer: Not much alone, but plenty in aggregate with other individuals who know me, even casually. I don't think that line of reasoning would naturally occur to most people.

Then there's the issue of laziness. Web surveys and e-mail aside, pollling takes work. This is an assertion, but I'll bet that most people would rather decide and move on - even if they've not completely optimized that decision... something economists have pondered for years... which leads to Hanson's second post.

In it, he relates how the 18th century British navy regularly executed sailors for keeping independent, (but often more accurate) records of a ship's position - even if that information proved crucial to the success of a voyage and/or to preserving the lives of the crew (!) Hanson goes on to note that:

Even though shipmates had a strong common interest in knowing their longitude, other social incentives apparently prevented them from sharing their information. As a consultant on the use of prediction markets within organizations, I've also noticed that managers are often surprisingly uninterested in the prospect of more accurate forecasts and more informed decisions.  Could these phenomena have similar explanations?

I'm not at all surprised at the experience Dr. Hanson relates. I encounter similar obstacles in my work with large organizations attempting to anticipate the future and set strategy via interactive scenarios. As I've noted before, broad-based grass-roots information-aggregating mechanisms, (and particularly those that highlight who's a star and who's a dud) are deeply challenging to the hierarchy, tenure and implied competence of management in general and individual managers in particular. After all, what use is organizational resilience,  (i.e., through better prediction), if one's own career resilience becomes an impersonal victim of that process?

Then there's the issue of conflicting governance. I.e., if management and prediction markets are seen to be openly in conflict, who's really in charge? And more importantly, when does that governance decision get made? I suspect too, that social processes - already examined as they impact and are impacted by markets - hold a clue to this seemingly irrational group behavior.

P.S. Congrat to Dr. Hanson on his recent tenure to GMU's economics department.