Practical dos and don'ts of enterprise prediction markets

Effec%veEnterpriseMarkets:WhatmakesthemworkandWhy

Dr.RobinHanson,ChiefScien%stRebeccaWMunn,SeniorVicePresident

KMChicagoSeptember14,2010

Agenda

•  Introduc;ons•  WhatmakesEnterpriseMarketswork•  Whymarketsasamediumforpredic;ngthefuture•  EnterpriseDo’sandDon’ts•  Discussion

WhatMakesMarketsWorkBuyLow,SellHigh

price buy

buy

sell

sell

Will price rise or fall?

E[ price change | ?? ]

Lots of ?? get tried, price includes all!

“Pays $1 if Obama wins”

WhatMakesMarketsWorkExample:CurrentEventPrices

70‐71%RepublicanswinUSHousein11/201042‐47%Californialegalizesmarijuanain11/20106‐16%Californiacreditdefaultby201110‐20%USovertstrikeonN.Koreaby4/201124%USorIsraelovertstrikeonIranby201210‐19%USSup.Courtbansmed.mandateby201216‐18%PalinisRepublicannomineein201211‐30%Japansaysithasnukeby201345‐48%USCap&Tradesystemby201312‐14%ChinawaractonTaiwanby201315‐38%HiggsBosonseenby2014

www.InTrade.com

WhatMakesMarketsWorkBeatsAlterna%ves

•  Vs.PublicOpinion–  I.E.M.beatpresiden;alelec;onpolls709/964(Bergetal‘08)–  ReNFL,beatave.,rank7vs.39of1947(Pennocketal’04)

•  Vs.PublicExperts–  Racetrackoddsbeatweighedtrackexperts(Figlewski‘79)

•  Ifanything,trackoddsweighexpertstoomuch!–  OJfuturesimproveweatherforecast(Roll‘84)–  StocksbeatChallengerpanel(Maloney&Mulherin‘03)–  Gasdemandmarketsbeatexperts(Spencer‘04)–  Econstatmarketsbeatexperts2/3(Wolfers&Zitzewitz‘04)

•  Vs.PrivateExperts–  HPmarketbeatofficialforecast6/8(Ploh‘00)–  EliLilymarketsbeatofficial6/9(Servan‐Schreiber’05)–  Microsoiprojectmarketsbeatmanagers(Proebs;ng’05)

WhatMakesMarketsWorkExample:IowaElectronicMarket

“Prediction Market Accuracy in the Long Run” Joyce Berg, Forrest Nelson and Thomas Rietz, Jan. 2008.

Item 1988 1992 1996 2000 2004 All

# big polls

59 151 157 229 368 964

Poll “wins”

25 43 21 56 110 255

Market “wins”

34 108 136 173 258 709

% Market

58% 72% 87% 76% 70% 74%

P-value 0.148 0.000 0.000 0.000 0.000 0.000

WhyMarketsasaMediumforForecas%ngAdvantages

•  Numericallyprecise

•  Consistentacrossmanyissues•  Frequentlyupdated•  Hardtomanipulate•  Neednotsaywhohowexpertwhen

–  Issueisnotexpertsvs.amateurs

•  Atleastasaccurateasalterna;ves

Incen(vesSelf‐Selec(onCorrectBiases

WhyMarketsasaMediumforForecas%ngCollec%veForecas%ng

ForecastsOnRequestedTopicsUser

Contribu;ons UserScores

Engagement

WhyMarketsasaMediumforForecas%ngCollec%veForecas%ngQues%ons

Consensus

MyForecast MyScore

Truth

Whatexactlyismyinfluence?

Whatexactlyaremyincen7ves?

HowexactlydoIexpressmyopinion?

WhyMarketsasMediumforForecas%ngEdi%ngInterfaceIsTransparent

Consensus

MyEdits MyScore

Truth

Idirectlychangetheconsensus

Ifmyeditincreasestheconsensuschanceoftruestate,Iwin.

Else,Ilose.

WhyMarketsasMediumforForecas%ngFactorsMightInfluenceSales

•  Economyrecoversfast?

•  Compe;torsintroducenewversion?•  Wedobigpromo;on?

•  Welowerprices?Theylowerprices?•  Weadddistribu;onchannel?

•  WeaddfeatureF?TheyaddfeatureF?

•  Ourdefectrateverylow?

E[Sales|Factor]P[Factor]

WhyMarketsasMediumforForecas%ngIssues

Input:Contribu%ons•  Whatinfocanexpress?•  Howaccountforcosts?•  Wholetinwhere?•  EnoughIncen;ves

–  T‐shirtsenough?–  Zero‐sumscoring?

•  LimitCosts–  AwkwardInterface–  Waitforofferaccept–  Retribu;on

Output:Forecasts,Scores

•  Whatques(onscanask?

•  Howaccountforvalue?•  Useorvalidatesystem?

•  Shouldadjustoutputs?•  Wholetseeoutputs?

•  Sabotage&manipula;on

•  Legal,P.R.risks?

WhyMarketsasMediumforForecas%ngRequirements

•  Ques%onsreallywantanswerednow–  Willeventuallyknowanswer(orparts)

–  Suspectnotgeongfrankinfoviausualchannels–  Don’tmindpar;cipantsknowingbestes;mates

•  Peoplewhohaveorcangetkeyinfo–  Their;meisthemaincost

–  Lihlepenaltyforinvitemanydon’tknow

•  Incen%vestoen;cecarefulpar;cipa;on–  Money,ahen;on,influencecanlegallyoffer

–  Valuedwhenques;onsanswered

•  Manyfastques;ons,statusquoes;mates

Use:

Validate:

EnterpriseDo’sandDon’tsofEnterpriseMarkets

•  Do–  IntegrateintoEnterpriseprocesses–  Nurtureexecu;vesponsorship–  Makeaccessibletoall

–  Customizetoyourbusiness

–  MakeitPartofyourValueProp

Customer

14

IntegrateIntoEnterpriseProcesses

• Facingtoomanyunknowns,leaderswereplanningforallpossiblefutures

• Costlyand;me‐consuming

• Deployedinternalmarket,integratedintoexis;ngEnterpriseprocessesanddashboards

• Appropriate;mehorizonsmatchedEnterprisedeadlines

• Increasedaccuracyfrommarkethasstreamlinedshortandmid‐termplanning

• An;cipatedimprovementsinmetrics,e.g.cashmanagement,balancesheet

Customer

Challenge Ac;on Result

15

NurtureExecu%veSponsorship

• Marketintroducedbyself‐ini;a;ngteam,notC‐suite

• Fitentrepreneurialculture

• S;llneededtodriveawareness,par;cipa;on,andexecu;veusage

• Soughtexecaircover,notmandate

• Targetedkeyleadersasearlyadopters

• Championisoneoftopusers

• Openedmarkettoeveryone

• Balancedtop‐downendorsementwithbohoms‐upculture

• Grassrootsgrowthmoresustainable

• Consulta;verela;onshipwithkeyleaderspaveswayforfollowers

Customer

Challenge Ac;on Result

16

MakeItAccessibleToAll

• Acceleratetheprocessofpriori;zingideasandproductfeatures

• Engagemoreemployeesininnova;on

• Incorporatedmarketintobroaderinnova;onplaqorm

• Deployedmarketglobally

• Feedideastoeverybusinessunit

• Improvedoverall;metomarket,speedofideaac;on‐by100days

• 5‐10XROI• Tripledcollabora;onandcutduplicateideasinhalf

Customer

Challenge Ac;on Result

17

CustomizeIttoYourBusiness

• Lookingfornewwaystoengagetheircustomerbase

• Seekingdifferen;a;onfromthesignificantcompe;;onintheirmarket

• Marketwell‐namedandbranded

• Seamlessintegra;onwithcompanywebsite

• Developcustominterfacetomatchusercommunity

• Madeitfamiliarandinstantlyaccessibletotargetgroup

• Drovepar;cipa;onandacceleratedengagement

• Differen;atedfromcompe;;on

Customer

Challenge Ac;on Result

18

MakeItPartofYourValueProp

• Customersrepresentbroadarrayofindustrystakeholders

• Universalclientneed:predic;ngbehaviors

• Tradi;onalresearch&forecas;nginsufficientgivenindustrychanges

• Recognizedmarketasamplifierofexis;nginforma;onandserviceofferings

• Integratedmarketintoallaspectsofhowtheycreatevalueandconductbusiness

• Provideclientswithbeherdataviapublicmarket

• Enableclientspecificexperience

• Providesuperiorservicesand;melyinsights,createcompe;;veadvantage

Client

Challenge Ac;on Result

19

EnterpriseDo’sandDon’tsofEnterpriseMarkets

•  Don’t–  Runa30daypilot–  Useasimilargroupofpar;cipants

–  Runamarketwithoutpromo;ngit

–  Assumeleaderswillactoninsights

Customer

20

Discussion