Groups are smarter than the individual – Map trends using «prediction markets»

Since time immemorial people have tried to predict the future. From fortune telling to reading tea leaves, everything has pretty much been tried, but many of these methods have proved of little value.

For the past 20 years prediction markets have been making waves. Scientific field studies have shown that statements made based on these types of markets come quite close to the actual outcome of the event in question.

Becoming a millionaire thanks to collective intelligence

To date there are numerous examples of this phenomenon. There are the lifelines provided on the TV show «Who wants to be a millionaire? ». The studio audience provides the correct answer significantly more often than the would-be «expert» a contestant may choose to call using a lifeline.

The phenomenon of «collective intelligence» is not a new invention, however. It is based on a rather coincidental discovery made by British researcher Francis Galton. In 1906 the scientist let about 800 people attending a country fair estimate the weight of an ox. The participants in his experiment had different levels of know-how, some were laypeople while others were experts.

The average weight estimated by all of the participants combined came in at 1197 pounds. The actual weight of the ox totalled 1198 pounds. Whereas Galton’s aim had been to scientifically prove the «stupidity of the masses», he proved instead the existence of collective intelligence, the «vox populi» (latin for «voice of the people»).

Trade like on the stock market

Prediction markets also take advantage of collective intelligence. The players who act as traders make up the intelligent collective.

A prediction market works much like a real stock market. Instead of trading in company stock, shares are traded in upcoming events such as sports events, economic or financial issues or even elections and referendums.

The most well-known are probably political prediction markets. These so-called «election markets» have been forecasting election results for over 20 years and delivering results comparable to polls. The main questions which need to be answered in an election stock market include «How will the parties perform in the upcoming elections? Which party will win and which will lose? » For election stock market traders their personal political preferences are not at the forefront, but rather exclusively the effective final result they expect.

In practice this means that if a trader considers a party’s market share to be overvalued, he or she will sell the shares. On the other hand, a trader should buy shares in a party estimated to be undervalued.

A trader’s sole objective is to reap gains. The most successful participants appear on the daily updated ranking list and at the close of the market they are declared winners and can win non-cash prizes. To be successful participants, traders must observe the market closely, have the most up-to-date information and react to new developments, and, above all, avoid making «nonsensical» transactions.

Participation

At the start each participant receives a fixed number of shares and a virtual amount of money (currency «EX») to begin trading. The goal is to maximize capital through good forecasting and skilful speculations. At the end of the game all shares are bought back by the bank at the official result price of the predicted event (e.g. official election results).

Take part and register here.

You will find brief instructions for easy access here.

Tips and Tricks provide you support and contain useful hints for a good strategy.

Frequently used terms are defined in Prediction Markets ABCs.

pro:kons prediction markets

This prediction market is based on the pro:kons prognosis module, which is a product of BDF-net Agentur für neue Medien GmbH in Vienna. The product name stems from the German words for prognosis (PROgnose) and consensus building (KONSensfindung). Pro:kons also offers a software module to define consensus in decision-making processes within organisations. Learn more about pro:kons at www.prokons.com.

Scientific research on election stock markets

Towards the end of the summer it is expected that one or two universities will launch research projects on election stock markets. For this purpose, they will receive access to the anonymous transaction data (trading data) available on pro:kons’ database in order to study share price changes related to the election campaign. It is possible that election stock market participants will be contacted by email to take part in a short survey.