The Wisdom of Crowds: Decision Markets

Iowa Electronics Market (IEM) project — futures markets that use the crowd wisdom associated with a market to predict election results.

Hollywood Stock Exchange (HSX) does the same with box office returns.

DARPA’s FutureMap program was a short-lived

set of internal markets, which would have been quite small and open only to intelligence analysts, and perhaps a small number of outside experts. These markets might actually have tried to predict the probability of specific events, since the traders in them would have been able to lie on classified information and hard intelligence data in reaching their conclusions. The hope was that an internal market would help circumvent the informal politics and bureaucratic wrangling that have indisputably had a negative effect on American intelligence gathering in, in no small part by shaping the kinds of conclusions analysts felt comfortable reaching. In theory at least an internal market would have placed a premium not on keeping one’s boss or one’s agency happy, but rather on offering the most accurate forecast.

The second part of FutureMAP was the so-called Policy Analysis Market (PAM), which in the summer of 2003 became the object of a firestorm of criticism from appalled politicians. The idea behind PAM: just as the IEM doe s a good job of forecasting election results and other markets seem to do a good job of forecasting the future, a market centered on the Middle East might provide intelligence that otherwise would be missed. What distinguished PAM from the internal market was that it was going to be open to the public, and that it seemed to offer the possibility of ordinary people profiting from terrible things happening.

These markets have very little money at stake, but they work pretty well in terms of efficiency and prediction.

Given the right conditions and the right problems, a decision market’s fundamental characteristics — diversity, independence, and decentralization — are guaranteed to make for good group decisions.

Tap into collective knowledge with: stock prices, votes, point spreads, pari-mutual odds, computer algorithms, futures contracts. Anything that aggregates individual opinions into a collective decision.

What makes a system useful is its ability to recognize losers and kill them quickly.

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