Are crowds really wise? A growing number of businesses are betting they are. The latest venture is a new incarnation of The Industry Standard, the poster child for the rise — and precipitous fall — of the dot-com boom.
Published by International Data Group (InfoWorld's parent company), the new Industry Standard won't be the telephone-directory-sized magazine of 1999; in fact, it won't be a magazine at all. The Industry Standard, which launched this morning, is a Web site featuring editorial content about online business, with social-networking components and an online "casino" where readers make mock-currency bets based on their predictions about trends and events in the world of technology.
You might think that bets placed with Monopoly money wouldn't be meaningful. You'd be wrong. A significant body of academic research supports the idea that predictive markets — such as Iowa's Electronic Markets, which features small wagers in real money on national politics — actually outperform conventional polls, whether or not real money is involved. Moreover, the data generated by those markets has real value.
Hewlett-Packard, for example, has been experimenting with an internal predictive market for at least seven years. In one early trial, sales people were encouraged to bet on the number of printers the company would sell. The result? The bettors' predictions were closer to the actual sales numbers than HP's own internal forecast, said Bernardo Huberman, director of information dynamics at HP Labs.
Emile Servan-Schreiber, a cognitive scientist and artificial intelligence engineer who co-founded NewsFutures, a five-year-old, online predictive market, says that Google, Microsoft, and perhaps 100 other companies are also experimenting with internal predictive markets. And HP, said Huberman, plans to monetize its work by selling predictive market software and possibly running markets for other companies.
Indeed, the global equities markets are, in effect, predictive markets, said Stanford University's William Sharpe, a Nobel Prize-winning economist. Prices, he said, are very efficient accumulators of information. What about predictive markets for politics and other arenas? "I'd much rather look at the Iowa market than any of the polls. It's more accurate," he said.
Betting on the White House — and more
It's generally illegal in the United States to bet real money in a predictive market. But the Iowa Electronic Markets was granted an exemption because it is widely used for academic research.
It works like this: A given candidate – say, Hillary Clinton – is represented by shares of virtual stock. In the event that she actually wins the nomination, each share will be worth $1 in real money. If she fails, the stock becomes worthless. Until the day of the actual nomination, traders can buy and sell — and even short — her stock.
On the evening of Feb. 1, her shares were selling for a bit more than 59 cents, while rival Barack Obama's were valued at a bit below 48 cents. On the Republican side, shares of John McCain had soared to 82 cents, well above his closest competitor, Mitt Romney, at 12 cents