Bambi Francisco & friends discuss the NewsFutures Exchange on Vator.tv

Bambi Francisco left CNBC’s MarketWatch last year to start Vator.tv, a highly entertaining video-based website dedicated to vetting pitches from innovator. This week, her show took a deep look at NewsFutures’ public prediction exchange (not our enterprise solutions business). Paul Martino, whose company Aggregate Knowledge is about predicting behavioral outcomes based on the aggregate actions of crowds, brought his expert point of view. All told, Bambi, Paul, and Ezra Roizen (a Vator.tv regular) “liked the company.” Check out the show by clicking the video below:

Financial Times writes about Bet2Give

Over the weekend, the Financial Times published a great article about America’s favorite charity-driven prediction market: our very own Bet2Give. Exploring the intersection between philanthropy and online betting requires dedication and persistence, which is another way of saying that the value proposition isn’t immediately obvious to everyone, but the FT’s article highlights an exciting new trend: Some charities are now linking to Bet2Give from their home pages, encouraging their members/donors to use our prediction market as a fund-raising tool. Cool! That’s exactly what we built it for.

There is a discordant note at the end of the article, where respected philanthropy consultant Lucy Bernholz questions whether Bet2Give’s donations aren’t just a gimmick to draw eyeballs. Well, we obviously want to grow traffic, because that translates into impact. But Lucy should realize that 95% of the money that is put into Bet2Give by its traders is eventually given to their chosen non-profits. That’s hardly a gimmick. Few non-profits, in fact, have such low overhead fees.

The article also discusses Longbets.org, another great site well worth visiting.

Red Herring in the Mediterranean

I had the honor this week of being a surprise keynote interviewee at the Red Herring Europe 2008 conference in Malta. Alex Vieux, the Herring’s inspirational publisher, made the impromptu decision to bring me on stage to educate the audience, filled with brilliant young entrepreneurs and venture capitalists, about the concept and virtues of prediction markets. A show of hands, afterwards, indicated that this crowd agreed we were onto something big!

How InterContinental Hotels Group Innovates with NewsFutures

Every business needs to innovate regularly, but betting on new ideas is always risky and the failure rate is high. The New York Times recently ran a detailed article about how companies can better their odds of harnessing and selecting winning new ideas, by turning to prediction markets and the wisdom of crowds.

The InterContinental Hotels case study features NewsFutures’ Idea Pageant, a proprietary prediction market variant that we designed especially with a large-scale innovation process in mind: Whereas regular “trading” markets can be used to rank a few ideas, this approach is terminally cumbersome when dealing with several dozens or hundreds of ideas… The Idea Pageant, on the contrary, is highly scalable, as this case study illustrates.

Here’s the relevant extract from the New York Times article:

At InterContinental Hotels, Zubin Dowlaty, vice president for emerging technologies, decided to create an online market last fall to “harvest and prioritize ideas” from within the hotel’s 1,000-person technology staff. “We wanted to tap the creative class that may not be able to voice their ideas,” Mr. Dowlaty said.

With InterContinental’s prediction market, players were asked to submit ideas anonymously, with a description and the benefit to customers and company. The bettors were given virtual tokens, each receiving 10 green ones to be placed on the best ideas and three red for bad ideas.

There were no limits on the number of times bettors could change their wagers as new ideas came to market, and the market was open for four weeks. The five top ideas (most green tokens), five bottom ideas (most red) and the top five bettors (most accurate, according to market consensus) were listed regularly.

The winners got $500, while second- and third-place finishers received $250 each. The winners, Mr. Dowlaty said, were engineers, analysts and contractors, not managers.

More than 200 people participated, submitting 85 ideas. One person proposed bringing back quarter-operated vibrating beds. “That one got beat down really fast,” Mr. Dowlaty said.

The winning ideas were suggestions to improve searching the company’s Web site to find and book hotel rooms. Two projects have been started as a result of the market, Mr. Dowlaty said.

Next, he said, prediction markets may be opened up to InterContinental’s customers, probably beginning with members of its Priority Club loyalty program. They could bet in markets for improving service and offerings, with points redeemed. “It’s the next frontier and the natural progression for this,” Mr. Dowlaty said.

Still crazy bullish after all these years

The growth of interest in prediction markets as decision-making tools continues to accelerate around the world. In the last month alone, we’ve been interviewed on Public Radio (WYPR in Baltimore) about the U.S. presidential primaries, presented at the eFinanceLab conference in Frankfurt, fielded questions from an Executive MBA class in Hong Kong, and spoke at length with a reporter from the Economist and another from a financial magazine in Jordan…

Later this month, on March 25th, I’ll be speaking at the Santa Fe Institute’s Business Network Workshop in Washington D.C., entitled Control in Distributed Networks (Decisions 2.0: Distributed Decision-making). The workshop will examine “the theory and practice of decentralized and distributed decisions in government, non-profit and commercial organizations.” I’ll present case studies of prediction market use in all these contexts.

In these heady days, it’s good to remember that the current widespread interest in enterprise-class applications of prediction markets was not always there. I remember oh so clearly the DIMACS Workshop on Markets as Predictive Devices that was held at Rutgers three years ago, in February 2005. The other speakers were so downbeat about the penetration of prediction markets in the business world that I felt compelled to change the title of NewsFutures’ late-in-the-day presentation from “Corporate prediction markets: Lessons from the real world” to simply “Bullish!“. How right we were to believe and persevere! But at the time, the business value of prediction markets wasn’t the obvious bet it is today: Three years ago, NewsFutures’ only serious competitors in the enterprise space were Carol Gebert’s Incentive Markets, and Charles Polk’s Common Knowledge Markets, both since defunct. We salute them. These days, in contrast, the “wisdom of crowds” niche has gotten pretty crowded, as new entrants around the world have sought to emulate our success and that of a few other pioneers, thereby helping to create a thriving new industry. We’ve come a long way, baby!

eFinanceLab Conference in Frankfurt

This week I’m off to Germany to present at the University of Frankfurt’s eFinanceLab Spring Conference (thursday Feb 21). I’m teaming up with the City University of Hong Kong’s Christian Wagner to talk about how prediction markets can be used to manage risk in the financial sector. I’m also looking forward to a private meeting with professor Bernd Skiera, who has co-authored with Martin Spann some excellent papers on using prediction markets for business forecasting.

Professor Wagner and I will present some results from our recent experiment of using markets to predict trends in Hong Kong property values. Other results will be presented from the prediction markets NewsFutures has operated for various clients such as the World Economic Forum, Eli Lilly and the Texas Department of Transportation. If time permits, we might even discuss Intrade’s US recession market and NewsFutures’ own presidential markets.

The last time I was in Germany was in 2005, when NewsFutures implemented an internal prediction market at Siemens, to forecast sales of its cellular phones. The pilot, although conclusive — the market outperformed official sales forecasts — unfortunately did not survive the sale of the cellular phone division to a Taiwanese company, which soon went bankrupt…

Political prediction markets are good for your health

In his latest best-selling book “The Logic of Life”, undercover economist Tim Harford makes the point that voting is a fool’s errand and that, rationally, everyone should be gambling instead. A recent New York Times review sums up the author’s position as follows:

If you really want to make a difference, buy lottery tickets — your chances of hitting the jackpot are roughly equal to your chances of swinging an election — and devote your winnings to political lobbying.

Lottery tickets? Surely you’re joking, Dr. Harford! The economic rational man or woman should instead be playing the political prediction markets, which offer much better odds of winning than lottery tickets!

But even that misses the point of why people should play real-money political markets, like Intrade or Bet2Give. The main benefit is that, win or lose, it’s likely to help you live longer. You read it here first.

How so, you ask? Well, it is a well known fact that stress weakens the immune system, which in turn makes you more vulnerable to, say, death by cancer. We also know that one of the major causes of stress is the lack of control over your environment. Psychologists call that “learned helplessness“, and its adverse effect on health has been dramatically illustrated by experiments such as the following (from a National Institute of Health report):

In one study rats were given injections of cancer cells following experience with [electric] shocks that were either uncontrollable, controllable, or nonexistent. The rats that received the uncontrollable shock (the learned helplessness rats) were less able to resist the cancer cells, and less than one-third survived. In contrast, some rats experienced the same intensity electric shock but could turn off the shock by pressing a lever. Two-thirds of these rats survived. Other rats were placed in the shock compartments but experienced no shocks. A little more than half of these rats survived.

When it comes to political elections, most people feel quite like those helpless rats receiving uncontrollable shocks. Your individual vote, if you even have one, doesn’t amount to any kind of meaningful control over the outcome, even though this outcome can be extremely aggravating emotionally, financially, and/or physically if the wrong person wins. The resulting stress can reduce your ability to fight diseases, as it does in rats.

But prediction markets finally offer a way to break free of our “learned political helplessness”. Now you can hedge against despair by investing in the election of candidates you dislike. Your preferred candidate wins: rejoice! The other guy wins: at least you’re compensated for the aggravation… Furthermore, you can use your winnings to improve your immediate environment anyway you choose, which beats hoping that your vote will help elect the right guy who will then, perhaps, change your world for the better. Like those rats who get to exercise a measure of control over their shock treatment, your stress level is reduced by your renewed sense of control over political outcomes, and you get to live longer as a result.

In the context of this high-fever election year, it would not be difficult for psychologists to test empirically the health benefits of political prediction trading, or at least it’s effect on politics-induced stress levels. Needless to say that NewsFutures would be happy to collaborate on any such research project which would, if the results are as we expect, provide compelling reason for enshrining political betting as a basic human right, alongside voting.

Their finest hour

Far from failing in New Hampshire, prediction markets performed at their best, providing traders with a much needed reality check.

Hillary Clinton’s upset victory in New Hampshire has encouraged venomous criticism of prediction markets for having overwhelmingly predicted an Obama victory instead. Proof, they say, that all this talk about the superior ability of markets to peer into the future is just so much hype.

This isn’t the first time that an election cycle provides the fuel needed to burn markets at the stake for the heresy of pretending to make useful predictions by harnessing the wisdom of the crowds. We’ve been here before. Remember the Democrats retaking the Senate in 2006, against all odds, or Howard Dean’s unforeseen collapse in 2004 in Iowa?

The classic first line of defense in these cases is to remind people that market “predictions” are really just probabilities, so any one outcome cannot invalidate the approach. The argument is sound and backed up by loads of data. But it would of course be much more convincing if we, as an industry, would remember to show at least as much humility when our market “predictions” appear correct instead. If you’re going to spread the idea that your market called all 50 states in the last U.S. presidential election because each correct outcome was predicted with over 50% chance, then you can’t hide behind probabilities when an 80% prediction comes to naught, as in Obama’s NH collapse.

The second typical line of defense is to admit fallibility, while, paraphrasing Churchill, claiming that “prediction markets are the worst form of forecasting, except for all those other forms that have been tried from time to time”. It is indeed easy to argue that pundits and polls erred even more than markets last Tuesday.

But over here at NewsFutures we don’t think markets have anything to apologize for. We think, rather, that they performed perfectly in New Hampshire, doing exactly what they are designed to do: capturing the consensus opinion in a much finer and dynamic way than all the amorphous media buzz, and, remarkably, giving Clinton a significant chance to win — 20%, give or take a few — even while the pundits and the polls, and some in her own campaign, had already left her for dead.

In fact, it is possible that the people who, on election day, had the best notion that Clinton could still pull it off were those staring at the price of that Obama stock, having to make a decision to buy, hold or sell. Why, they wondered, is it stuck at 80% if it’s such a sure thing? Why are there still people on the other side willing to put down good money on Clinton? What do they know that I don’t? What reports are they reading, what polls are they looking at? Prediction traders were surely among the very few people who, on election day, were confronted with the reality that Obama could still lose, despite what they heard from the pundits and the polls. By virtue of playing the market they were thus better informed than anyone else. For that reason, the NH primary should be chalked up as one of the prediction markets’ finest hours.

Bet2Give on CNBC

Norris Clark, NewsFutures VP for North America, was interviewed today on CNBC by Maria Bartiromo, about our innovative Bet2Give prediction market. Note that the caption on the screen shot below is pretty funny, since Bet2Give is rather more about turning vice into virtue than turning vice into profit… But who cares, it was a really great show! Click on the image below to view the video on the CNBC website.

Off to Hong Kong

I am off to Hong Kong tomorrow to deliver the keynote speech at the 9th Asia Pacific Knowledge Management Conference. My presentation about the implementation and benefits of enterprise prediction markets will be followed by an afternoon workshop.

Update: Picture of myself conducting a prediction market workshop at the City University of Hong Kong. Participants traded predictions about the red hot Hong Kong property market. Don’t be fooled by the bored look of the woman in blue, she actually made the best trades of the day! It was my first trip to Hong Kong and I was particularly moved by the superb statue of Bruce Lee on the Kowloon boardwalk. Long live the dragon!