The New Yorker magazine’s financial correspondent, James Surowiecki, has an article in the issue of 2007-07-09 about the use of prediction markets to forecast the success of Hollywood movies, and the uptake of new consumer products. One advantage of prediction markets over focus groups or delphi forecasting techniques is that prediction markets value diversity of opinion and differences in private information, and thus do not suppress these differences in a desire to achieve a consensus.
“MediaPredict, however, is wagering that in the real world success is, at least in part, predictable, and it follows a model that, over the past decade, has proved surprisingly effective in forecasting a wide range of events: the prediction market. Prediction markets function like futures markets, except that, instead of betting on the future performance of a company or a commodity, people can bet (often with play money) on things like election outcomes, current events, and product sales. Rather than relying on the gut instincts of a single decision-maker, prediction markets tap the collective intelligence of everyone playing the market. The most successful media prediction market is the Hollywood Stock Exchange, in which traders collectively forecast the box-office performance of Hollywood films, Oscar nominations and results, and the performance of individual actors, with striking accuracy. The market on average picks more than eighty per cent of Oscar nominees correctly, and hasn’t missed more than one Oscar winner in the past four years. More important, it has also done a good job of predicting box-office performance. According to a study by Anita Elberse, a professor at Harvard Business School, the market’s forecasts are off, on average, by sixteen per cent—far from perfect, but a track record that most studio marketing departments would be proud of.
It isn’t just Hollywood, either. A British firm called Brainjuicer has been using collective intelligence to research the prospects of everyday consumer products, and its findings suggest that such techniques can forecast more accurately and subtly than traditional consumer research methods, which have a reputation for producing mediocre results. For instance, prediction markets avoid many of the faults of focus groups, which tend to be dominated by the loudest and most opinionated people, to be driven toward consensus decision, and to discourage disagreement, making them of limited usefulness. (“Seinfeld,” famously, was a complete bust with focus groups.) Prediction markets, by contrast, are competitive environments, and so they encourage diversity of opinion, minimize people’s influence on one another, and force people to think not only about their own tastes but about those of consumers as a body.”