Capturing the collective intelligence of a diverse group of people to give you insight about what may happen in the future vs. relying solely on individual experts is a powerful phenomena many organizations and individuals are increasingly beginning to take advantage of. How does this work? Typically, a question is posed. For example, "Who will win the Super Bowl?" or "What will the price of Soy Beans be in June?" The possible answers are represented as stocks (thus the market terminology.) You can buy and sell shares in these stocks to express your opinion on what you think is going to happen. The stock price either represents the probability of an event occurring or an actual value. Buy shares if you think the probability or value should be higher; sell shares if you think it should be lower. The theory is that by a diverse group of people expressing their opinion (sometimes referred to as the wisdom of the crowd) of what they think will happen using this market mechanism, an accurate prediction will be elicited.
What are some examples of public prediction markets?
One of the first and oldest prediction markets was run by the University of Iowa in 1988 to predict the outcome of United States Presidential Elections. In fact, those markets have been more accurate than the most accurate polls in every election the University of Iowa has run their markets. Since then there have been numerous examples of companies using prediction markets to forecast product sales, revenues, and the completion dates of large projects. The Pentagon even tried prediction markets in 2003 to forecast economic indicators in the Middle East before it was shut down because of the discovery of other questions being asked about terrorist targets and war casualties (political hot potato.) Some public prediction market exchanges such as TradeSports, located in Ireland, even use real money and have contracts on sports and current events. There are also many play money prediction markets. Besides Inkling and our customers who have created several public marketplaces, most notably CNN's Political Market, the Hollywood Stock Exchange runs an exchange to predict box office performance of Hollywood movies, and the simExchange is a new marketplace focused on the sales of video games.
Our corporate customers are using prediction markets for a wide range of uses. A few examples:
- A large bank is using Inkling to drive internal innovation;
- An automotive manufacturer is using Inkling to augment their existing demand forecasting processes;
- A large telecommunications company is using Inkling to predict quality control issues of large equipment they manufacture;
- A gaming software company is using Inkling to predict industry quality scores of their products;
- The Government of Singapore is using Inkling to forecast long term social and technology trends;
- Pact, a large Washington DC non-profit is using Inkling to generate new ideas from aid workers to implement in the field;
- ABC-KGO San Francisco is using Inkling to interact with their viewership by allowing them to trade in markets related to local and regional current events;
- Media Predict is partnering with Simon & Schuster and using Inkling to find books by unknown authors to publish
Read more about how to use prediction markets in our how to use section.
What value do businesses get from using prediction markets?
- Improved forecasting: Leveraging a diverse group of people with different viewpoints about future sales, revenues, etc. typically generates a more accurate forecast than traditional forecasting methods.
- Decreased risk: Markets can act as an "early warning system" by giving the business a constant pulse on people's opinions. Knowing about a problem and addressing it early can have huge cost and competitive ramifications.
- Increased employee morale / retention: Employees feel like they have skin in the game and are involved in decision making as they never were before.
- More ubiquitous innovation process / culture change: A marketplace of ideas provides a credible process for employees where they have incentive to contribute ideas for improving business processes or thoughts about new products.
- Improved customer loyalty: A marketplace made available to customers makes them feel they are helping to drive product development.
- Increased value from vendors: A marketplace made available to vendors and/or business partners to solicit ideas or assist in forecasting enriches the relationship and provides valuable input from those who have a useful outside perspective of your business.
Besides forecasting, are there other uses of prediction markets?
Most senior executives we talk to say one of their biggest areas of concern for the future of their business is innovation. Where are they going to get the next big idea? Where is their next big money maker going to come from? The typical answers today are from high paid strategic consultants, executive retreats, from an R&D group, etc. Rarely do we hear people say: "from our people." We strongly believe a company's own employees have the answers those executives are looking for. They know the customers, they know the products, they are on the front lines every day listening and experiencing what works and what doesn't. Why not give them an outlet to act more like entrepreneurs vs. just a sales or customer service rep? Why not set up a marketplace for employee's ideas, where their peers can buy and sell shares in the ideas they think will be successful for the company, and then reward owners of the stock if the idea makes money for the company?
How should the results of the markets be used in making business decisions?
Businesses should not rely solely on market results for business decisions but they can be very valuable input. As discussed in the business value section above, markets provide a level of transparency that does not usually exist and they can be an excellent early warning system and risk mitigator. For example, if the market reflects people's perceptions that a project is going to be late early in the development lifecycle, understanding why and dealing with those issues immediately is much better than what typically occurs: problems continue to percolate and most people are in the dark that there will be significant delays until it's too late to do anything about. One sees this regularly in the form of delayed product announcements, inventory miscalculations, etc. How much does this end up costing? How much competitive advantage is lost? Markets are not a panacea, but they can be invaluable for navigating an efficient and prosperous strategic course.
Anything that has a quantitative, verifiable result can be forecast using Inkling. For example, quarterly sales figures can be verified, so they can be forecast ahead of time using Inkling. The outcomes of sporting events, political races, industry surveys, etc. are other examples of events that can be forecast.
How is Inkling different from a poll or survey?
In a poll or survey, people are usually asked what they want to happen. In a prediction market, the underlying question is always "what do you think will happen?" which is a very different question. Also, a survey or poll is a snapshot in time where as a market is a constant indicator of what people think. A market also allows people to apply "weight" to their beliefs. In a poll, one simply answers the questions and the value to the answer is the same no matter how strongly they believe in that answer. In a market a trader can spend more money to express a deeper belief in their prediction. A market also has a built-in incentive to participate: the ability to earn (fantasy) currency. Usually participation in a survey yields very little and participation is usually very low. A market is often seen as a game.
How many people must participate in a market for it to be accurate?
We've found if markets have at least a dozen participants who make one or more trades over the lifetime of the market, the outcome has a higher probability of being accurate than a market with fewer traders.
How accurate are the markets?
The accuracy of markets is dependent on several factors: the background of the participants, the information available, the number of traders, and the number of trades. Thus it is impossible to give an exact percentage accuracy. That said, there are numerous examples of markets correctly forecasting the outcomes of questions posed. For example, at O'Reilly Media where Inkling is used to forecast book sales, markets that had active participation had less than a 10% error rate. At last count on Inkling's public marketplace, the accuracy rate of the markets was 75% to 80%.
Can people manipulate the market results?
An individual trader with a single account cannot manipulate the markets. If one person has multiple accounts, it is possible to "game" the markets by constantly buying and selling shares between accounts to pump up one account. In a corporate setting where people only have one email address (our method of authentication,) this is a non-issue. There is of course always the possibility of collusion among market participants, which would require checks outside Inkling's purview. Regardless, we deploy a rules engine that examines each user that joins the marketplace to detect signs of manipulation.
How much money do people get to start?
New accounts receive $5,000 inkles to start but administrators can increase or decrease that starting amount if they wish.
Why only $5,000?
We determined after much experimentation during the development of our product that $5,000 enables a new trader to make one larger trade or many smaller trades, but does not allow someone to immediately have great influence on any individual market. This is important because for someone to exert great influence over a market, they must have exhibited the ability to predict accurately in previous markets.
How do people make money in Inkling?
There are two ways to make money in Inkling. Let's say a question is asked: "Who is going to win American Idol?" Stocks representing the various answers have prices associated with them. Remember, the price equates to the probability of the event occurring. If you buy "Chris" at $40, and Chris ends up winning American Idol, his stock will be "cashed out" at $100/share because the probability is now 100% he will win, which means you just made $60/share. You can also day-trade to make money. If you bought Chris at $40 and later that day his stock goes up to $50, you can close your position and make a $10/share profit. You lose money by the opposite happening. If Chris loses, his stock will be worth $0/share. If you owned shares of Chris at the end of the market, you would lose whatever amount you owned.
Can I create my own market?
Yes, Inkling has the ability for anyone to run his or her own markets. This is optional, however so a corporation or public marketplace may decide they want to create markets themselves in which case their traders will not see the option to create and manage their own.
What if the market is behaving irrationally?
Often times, especially when a market is first made available for trading, the prices will seem irrational. There is nothing wrong with this occurring, however. In fact, it's a perfectly natural event that usually results in the market adjusting itself over time. Why? Because a stock that is over-valued is a moneymaking opportunity for someone willing to "short" the stock (make a bet the stock price will go down.) The same theory holds true for an under-valued stock. Traders will see an under-valued stock as a buying opportunity and the price will rise more inline with what could be considered a "rational" market.
How is the price set? Does Inkling work just like the real stock market?
The real stock market works using an auction (called a Continuous Double Auction in market vernacular.) When you buy shares of a stock, you are actually buying them from someone else. You never know who that is because there are so many trades happening, a computer handles it all. The price represents whatever the last trader was willing to pay for shares. In Inkling, the price is set automatically according to the volume and sentiment in the market. For example, if someone buys 10 shares of a stock, we increase the price according to an algorithm. In essence, Inkling is always the seller if you want to buy shares and the buyer if you want to sell shares. The algorithm we use is called the Market Scoring Rule, invented by Professor Robin Hanson at George Mason University.
Are there advantages/disadvantages to using the Market Scoring Rule?
Using a market scoring rule means there can be far fewer traders in a market because there does not have to be as much "liquidity" for the market to reach a conclusion. Using an algorithm also enabled Inkling to remove a lot of concepts related to stock markets that are difficult for people to understand, i.e. bid-ask spreads, etc. Because an algorithm is setting the price of the stock vs. the traders themselves, price jumps and drops are much more methodical. Where as in an auction, the price is whatever someone is willing to pay for a stock so the swings can be much more dramatic.
Software as a service essentially means we host Inkling for you. In fact, no technical resources are necessary day to day from our clients to manage their marketplaces, create markets, etc. There is nothing installed at your datacenters and all users access our application through a browser (IE6+, Firefox, and Safari are all supported)
Can the software be customized?
We can customize the look and feel of any marketplace. Colors, fonts, backgrounds, etc. are all fair game. We have customized Inkling in the past to meet certain requirements, but all these customizations eventually make their way in to the application for everyone to use. We do not host separate versions of Inkling for each client. If you require a heavy amount of customization, we have a REST API that can be used to re-create much of the functionality in our marketplace.
Can I integrate Inkling with other systems I have?
Trading interfaces, leaderboards, stock tickers, etc. can all be re-created using our API and placed in other web applications. Trade data can also be acquired through the API to be used in other applications.
What reports do you generate about trading activity?
Performance data is available for each market to see the list of traders and how they compare to each other. The site also produces a "top traders" table to show whom the weekly and all-time best traders are. If you require other reports, you can use our API to extract the data to whatever reporting package you use. We can also send weekly or monthly reports on all trading activity in the marketplace.
I don't want people having yet another login. Can Inkling use my enterprise identification system?
Using a secure token mechanism we developed, people can be automatically registered in Inkling and they can use their enterprise identification to login vs. having a unique Inkling login. This typically requires a day of setup from one IT resource to implement.
Is Inkling Markets scalable?
We currently have tens of thousands of traders across our public and client marketplaces and have processed hundreds of thousands of trades. We have dedicated servers at our hosting facility and have not experienced any limitations due to hardware or software. As we scale, we are able to add additional hardware to our technical architecture to implement additional load-balancing across application servers and databases.
What amount of uptime is guaranteed by Inkling?
Inkling makes commercially reasonable attempts to maintain a constant up time for the application. In any of our contracts we reserve the right to have a 15-minute maintenance window on Sunday evenings. This window is typically between 12-3am ET. On rare occasions we must take the application down for a longer period of time. We try to give at least 48 hours notice before such an outage.