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PredictionMarket

There are 2 ways to view a PredictionMarket.

Wikipedia:James_Surowiecki’s book “The Wistom of Crowds” lists the following four elements needed to form crowd wisdom: (quoted from Wikipedia:Wisdom_of_crowds):

Four elements required to form a wise crowd

Not all crowds (groups) are wise. Consider, for example, mobs or crazed investors in a stock market bubble. Refer to Failures of crowd intelligence (below) for more examples of unwise crowds. According to Surowiecki, these key criteria separate wise crowds from irrational ones:

Failures of crowd intelligence

Surowiecki studies situations (such as rational bubbles) in which the crowd produces very bad judgment, and argues that in these types of situations their cognition or cooperation failed because (in one way or another) the members of the crowd were too conscious of the opinions of others and began to emulate each other and conform rather than think differently. Although he gives experimental details of crowds collectively swayed by a persuasive speaker, he says that the main reason that groups of people intellectually conform is that the system for making decisions has a systematic flaw.

Surowiecki asserts that what happens when the decision making environment is not set up to accept the crowd, is that the benefits of individual judgments and private information are lost, and that the crowd can only do as well as its smartest member, rather than perform better (as he shows is otherwise possible). Detailed case histories of such failures include:

(end Wikipedia:Wisdom_of_crowds quote material released under GNU Free Documentation License)

How Prediction markets tap Into Crowd Wisdom

PredictionMarkets tap into crowd wisdom by placing the incentive for correct decision making with each individual. PredictionMarkets work best when a knowledge about a problem is widely dispersed among many people.

PredictionMarkets do not perform well when all of the knowledge about a problem or its possible outcomes rests with just one person. (Example: when the outcome of a situation is based upon the decision of one person. Crowd wisdom is not any more effective at guessing what the decision will be than the individual guess of experts, or even non-experts).

PredictionMarket trading can be done with real currency, AlternativeCurrency (like a community currency that holds real value in certain locales), or with “play” money that has a totally imaginary value.

Relevance To Problem Solving

Typically we don’t know whether Action 1 vs. Action 2 will turn out to be a better decision (or which one, if any, will actually solve the problem). If had an easy method of generating adequately good predictions, it would make decision-making and problem-solving much easier.

(FIXME: is there some other page on “problem solving techniques” in general, or “group deliberating” in particular, that would be a better place for the following list?)

Given a set of potential actions, there are a wide variety of ways of predicting which would be the best, and then making a decision:

It has been argued that, in situations that have the above 4 elements, a prediction market is the best way of generating adequately good predictions.

A PredictionMarket can be used to inform collective problem solving efforts in a way that potentially reduces the some of the negative or counter-productive aspects of group deliberating around problems. Some of the known problems with deliberation can be:

(The above six points are aggregated from CassSunstein?’s book, Infotopia: How Many Minds Produce Knowledge).

PredictionMarket aggregation of knowledge can potentially avoid some or all of these problems by focusing people on an individual incentive that does not require deliberation.

further reading

some online prediction markets

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