Beyond HSX and the Oscars: Prediction Markets A Valuable Tool for Decision-Making

Posted · Add Comment

HSX traders did well.  They correctly predicted the winners for seven of the eight categories for which Award Options could be traded.  The only category they got wrong was Best Director.  HSX traders predicted the prize would go to David Fincher, for The Social Network.  The Oscar went instead to Tom Hooper, for The King’s Speech.  Interestingly, Tom Hooper actually led the category for most of the trading period.  It was only in the last few days that David Fincher pushed ahead.

So, is this an advert for HSX, or its phenomenal track record? Not really.  HSX is merely a prop.  The purpose of the two blogs, is to demonstrate that in situations where uncertainty and risk are present, there are better ways of making decisions than asking a “so-called panel of experts,” or asking the man or woman with the “biggest stick” to make the call. 

Divergent opinions carry information, especially when outcomes are uncertain, as is the case with introducing new products, forecasting sales, or formulating a plan to best manage urban traffic congestion.  When this divergence is suppressed by authority, or subjugated by experts, companies and organizations actually make riskier and poorer quality decisions.  

No wonder smart companies and organizations like Motorola, GE, Google, Best Buy, and Iowa Electronic Markets use some form of prediction markets, or group decision-making platform (like the Delphi technique, or the Nominal Group Technique) to harness and retrieve valuable information that lies scattered in various corners of the company, or among its many stakeholders.  And more importantly, they use it to stimulate consensual decision making, not by squashing divergent viewpoints, but by offering them an opportunity to test themselves against the opposition.

So, is the crowd always right and do the fittest ideas always get rewarded and selected for implementation?  Not always.  But if diverse thinking is encouraged, and diverse thinkers are allowed to collaborate in a decentralized manner, independent of authority, then their collective ideas and recommendations are likely to best those of a single person, the proverbial white knight CEO, or a small group of people, such as the Senior Leadership Team.

A word of caution though.  For prediction markets and other group-decision making platforms to flourish, experts and authority figures in companies/organizations need to experience a shift in mindset, from:

  • focusing on “knowing all the answers” to “asking the right questions”
  • an obsession with “gathering mountains of information” to “analyzing data in creative ways” 
  • a hierarchical approach to “making decisions” to “guiding decision making.”