Prediction Markets – A new way to forecast the future

Prediction markets are speculative markets created to make predictions about a particular event. The resulting market price demonstrates the probability of the particular event.   Many private companies have started to use prediction markets for innovation, forecast particular events of interest internal and external to the company, and to select different company initiatives such as “marketing campaigns” (http://en.wikipedia.org/wiki/Prediction_market#Use_by_corporations).


Positives?

Prediction markets have already begun to be used by government.   The University of Iowa’s Iowa Electric Markets has been used to predict presidential elections. Forecasting is currently used within government mainly for budgetary and financial purposes. Prediction markets could be applied here to create more accurate forecasts. In the book Predictocracy by Michael Abramowicz, he suggests other ways in which prediction markets could be applied in government. He suggests that prediction markets could be used to predict what a randomly selected judge or jury would decide in order to reduce the amount of lawsuits in the legal system. In addition, he believes prediction markets could be a tool to rate budget items by politicians in order to reduce partisanship in the budgetary process. He also believes that prediction markets could be used to discover if organizations were meeting required regulations. (http://www.psmag.com/navigation/politics-and-law/government-prediction-markets-3656/ )

Potential Negatives?

There are still a number of issues associated with prediction markets that are preventing their widespread adoption. Many are concerned about the possibility of individual actors to influence the markets. Economists seem to be divided upon the accuracy of prediction market data and what particular circumstances lead to accurate results – whether the probability of the event has to be 0 or 1, whether money is involved and, if so, how much, how the market is designed to allow people to participate, and so on. Finally, prediction markets depend upon participants in the market. So, in order for them to work, many people would have to be persuaded to use it.

Final Verdict?

 There are several different private firms that have developed to provide the prediction market service that could be used by government. However, due to the negative potential issues about prediction markets, we feel it may be beneficial to wait to use them until more private sector research has been done about their potential benefits (or) it can be possible to receive funding for a pilot experimental program.

For more information:

–  http://en.wikipedia.org/wiki/Prediction_market#Use_by_corporations

–  http://www.psmag.com/navigation/politics-and-law/government-prediction-markets-3656/

–  https://www.ida.org/stpi/occasionalpapers/papers/OP-2-2010-ImplementingPredictionMarketsInGovernment-v3.pdf

Advertisements

2 thoughts on “Prediction Markets – A new way to forecast the future

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s