Wisdom of the Crowd
Asking for Predictions

WHY ASK THE CROWD TO MAKE A PREDICTION?

The crowd (employees, stakeholders or customers) have information that is valuable. The trick is to aggregate all of that knowledge (similar to a survey or market research analysis) in order to make better decisions.

One thing the crowd has proven to be good at is making predictions.

Prediction markets are like a play stock market.  As in a stock market, people make investments, or bets, about whether the price of a stock will rise or fall.

But instead of buying stocks in a company, they are betting on whether future events will happen, or not.

It’s really quite simple.  Click here if you want to try making a prediction of your own.

When all of these bets are taken together, the output of the market is a forecast in terms of a probability:  there is an X% chance of event Y happening.

HOW DO ORGANIZATIONS USE PREDICTION MARKETS?

Strategic Planning

How likely is it that strategic objectives, or Key Performance Indictors be met? Likely to be met, or is the Strategic Plan not feasible?
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Risk Assessment & Governance

How likely is it that certain risks will come true?  Is this a high risk or low risk environment?

Resource Allocation

How likely is it that projects will be done on time?  If not likely, are more resources required?

PREDICTION MARKETS 101

Prediction markets mimic a stock market. Within the market, participants (also known as traders) can buy and sell shares of stocks that represent the possible outcomes of the event. For example, if the question is “Will Project X finish on time?,” then “Yes” and “No” would be stocks in that market. If I believe that Project X will finish on time, then I buy shares of “Yes.”

Each stock has a current price between $0 and $100 per share, which corresponds to the probability that it will be the correct answer. So if the price of “Yes” is $28/share, that means the market thinks there is a 28% chance that “Yes” will be the correct answer. Similar to a real stock market, the price of that stock increases as demand increases. So if many traders believe the project will finish on time, they will buy shares of “Yes,” causing its price (and therefore probability) to increase.

Once the “correctness” of an answer becomes known, the market is resolved. So if Project X finishes on time, then “Yes” would be resolved as the correct answer. At that time, traders receive $100 for any shares of “Yes” that they own. So if I purchased 10 shares of “Yes” at $28/share, then I’m paid $1000, netting me a profit of $720.