Not often does a paper from the American Economic Association meetings make the news, but on Friday a paper by Bo Cowgill, Justin Wolfers, and Eric Zitzewitz was presented about prediction markets at Google. This morning Noam Cohen at the New York Times reports:
A question never addressed in the report is what would seemingly be most interesting to an outsider: Do prediction markets work? Unlike surveys, the markets rely on something, I think the technical term is … oh, yeah, greed, to get their results.
Ask me who I think will win a baseball game, an election and an Oscar, and I can try to be objective, but I can’t help being influenced by who I would like to see win. (The Yankees, Fred Thompson, Pee-wee Herman; or is it the Yankees, Pee-wee Herman, Fred Thompson?) Put $5 on it, however, and suddenly I am willing to use all the information I have at my disposal to come up with the best answer.
When they exist exclusively within a company, these markets are a way of extracting hidden knowledge from the work force: if a floor salesman learns that a new TV model will be a dud, with a predictions market he can profit from that knowledge, and perhaps the chief executive can learn that as well.
See also the comments at Midas Oracle and Marginal Revolution. Justin Wolfers is guesting on the Freakonomics blog, where he mentioned this paper earlier last week, so maybe we’ll hear a little more about the paper there.
The Cowgill, Wolfers, and Zitzewitz paper, Using Prediction Markets to Track Information Flows: Evidence From Google, is available from Bo Cowgill’s website.