Sunday, December 17, 2006

Private Prediction Markets for Companies

I’ve been a fan of prediction markets since I saw Idea Futures (now Foresight Exchange) on the Web in something like 1995. Although Idea Futures and other early Web prediction markets were public, the use of private prediction markets within companies has been gaining momentum.

To understand what a prediction market is and why it can be valuable to a company, look at this:

When Todd Proebsting, director of Microsoft’s Center for Software Excellence, tested a prediction market internally, managers quickly gave it their blessing.

The goal: to have 25 members of a development team predict when a Microsoft product would ship (this was an internal product, not one sold externally). The prediction market was set up in August 2004, and the product that “had been in the works for a long time” was scheduled to ship in November 2004. Each “trader” received $50 in their account to start with, and was told that the more accurate their prediction, the more money they would make. The market opened with an initial price of on-time delivery set to 16 2/3 cents.

“The price of ‘before November’ dropped to zero right away,” Proebsting said. “The price of ‘on time’ in about two to three minutes dropped to 2.3 cents on the dollar.” Translated, that’s more than 30-to-1 odds against on-time delivery.

Then the woman who was responsible for scheduling started trying to convince her colleagues who were buying and selling future delivery dates. “She was able to talk (on-time delivery) up to around 3 cents,” Proebsting said. “People really enjoyed moving the price...They loved this.”

“The next day the director comes into my office and said, ‘What have you done?‘” Proebsting said. But further investigation showed that the product actually was behind schedule, even though nobody was telling management, and it eventually shipped in February.

Enough said.

(The excerpt is from Declan McCullagh’s coverage of a recent “micro-conference” on the subject, hosted by Yahoo.)

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