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Prediction Markets   Harnessing The Wisdom Of The Crowds
 

Prediction Markets Harnessing The Wisdom Of The Crowds

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An introduction to Prediction Markets and how enterprises can use prediction markets to aid decision making and business planing

An introduction to Prediction Markets and how enterprises can use prediction markets to aid decision making and business planing

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    Prediction Markets   Harnessing The Wisdom Of The Crowds Prediction Markets Harnessing The Wisdom Of The Crowds Presentation Transcript

    • MindHive Labs Harnessing the Wisdom of the Crowds
    • Agenda
      • What are Prediction Markets?
      • Where can you use them?
      • Who is currently using such markets and for what are they using it?
      • How do you implement such markets?
      • What is the value of such markets?
      • What are we offering?
    • Prediction Markets (PM-101)
      • Prediction markets are speculative markets created for the purpose of making predictions.
      • Virtual stocks are created whose final value is tied to the outcome of a particular event (e.g., will the project be completed on time) or parameter (e.g., total sales next quarter).
      • The current market prices can then be interpreted as predictions of the probability of the event or the expected value of the parameter.
      • In the simplest case,
        • You define an outcome for which you would like a reliable estimate
        • Then you invite people with relevant knowledge to trade "virtual" stock based on their confidence in this outcome.
        • The result is a trading price that tracks the consensus opinion (in contrast with the average opinion that a poll would yield).
        • Because the market is online, it involves any number of participants, from anywhere, at any time.
    • Agenda
      • What are Prediction Markets?
      • Where can you use them?
      • Who is currently using such markets and for what are they using it?
      • How do you implement such markets?
      • What is the value of such markets ?
      • What are we offering?
    • Prediction Markets have varied applications, both as a forecasting tool as well as a means of getting to know the opinion of the masses
      • Prediction Markets can be used to predict anything from how much will a movie earn at the box-office to who will win an election to how long will it take to complete a project.
      • Some of the typical applications of Prediction Markets are
        • Forecasting of election outcomes
        • Industry trend-spotting
        • Sales forecasting
        • Strategic commodity price forecasting
        • New Product Development
        • Resource Allocation
        • Project completion estimates
        • A way to tap into the wisdom of employees, partners and customers
    • Agenda
      • What are Prediction Markets?
      • Where can you use them?
      • Who is currently using such markets and for what are they using it?
      • How do you implement such markets?
      • What is the value of such markets ?
      • What are we offering?
    • Prediction Markets are gaining credence with many companies adopting it as a tool to complement their existing forecasting methods (1/3)
      • Sales forecasting
        • Arcelor-Mittal employees trade on the expected quarterly sales of hot-rolled steel
      • Strategic commodity price forecasting
        • Hewlett-Packard uses internal prediction markets to forecast prices of DRAM chips which constitute 7 – 10% of a computer’s cost.
        • Predictions from these markets have improved DRAM price forecasts by 1 – 2 % allowing HP to better price its computers. This has translated into savings worth billions of dollars for HP.
      • New Product Development
        • Yahoo allows its executives to trade on new product ideas conceptualized by its employees and uses this trading information to identify which products could be made into more complete prototypes.
        • Rite-Solutions , a U.S. software company specializing in military technologies, came up with a product through its internal market which today accounts for 30% of its sales
        • Eli-Lilly has used internal markets to predict which potential drug compounds would succeed. The market brought together information from toxicology reports to clinical test results and correctly predicted the three most successful drugs.
      • Resource Allocation
        • British Petroleum used internal markets to efficiently allocate resources to reduce its green-house gas emissions. Each business unit was given an emissions reduction target. The units were allowed to invest in emissions reduction directly or purchase reductions in emission from other units who were able to exceed reduction targets in a cheaper way.
      • Project completion estimates
        • Google over the past two years has run more than 130 markets on product launch dates and new office openings. They even run markets on how often particular products are likely to be used
        • Microsoft , since August 2004, has run 15 to 20 markets studying when a particular feature will work, when a project is ready for testing, or the number of bugs that will be reported in a piece of software in a given period
      • Industry trend-spotting (e.g. technology bets, regulation forecasting)
        • Eli-Lily allows employees to bet on which medications will be approved on time and on how many molecules will the FDA approve in a year
      Prediction Markets are gaining credence with many companies adopting it as a tool to complement their existing forecasting methods (2/3)
      • A way to engage customers and gauge their perceptions
        • Eli-Lily lets consumer-focus groups trade "stocks" in order to gauge their sentiments toward a particular product or to better understand market trends
        • Like Sunsilk’s www.gangofgirls.com , it is a way to engage one’s customers, but incorporating the excitement of gaming and gleaning valuable insights from the trading activity of your customers
      • Some other organizations harnessing the Wisdom of the Crowds
      Prediction Markets are gaining credence with many companies adopting it as a tool to complement their existing forecasting methods (3/3)
    • Agenda
      • What are Prediction Markets?
      • Where can you use them?
      • Who is currently using such markets and for what are they using it?
      • How do you implement such markets?
      • What is the value of such markets to your business?
      • What are we offering?
      • Who are we?
    • To implement such markets, simply decide on a key metric that you want to forecast and then let people trade on it’s expected outcome (1/2)
      • Say, you want to find out the performance of the Congress party in the next general elections compared to its performance in the last elections
      Identify Objective Design Market
      • So you decide to make a market out of it. You create 3 types of stocks predicting the performance. A variation of +/- 5 seats will be considered at par performance. The stocks state
        • Congress will increase its seats tally
        • Congress will lose more seats compared to last elections
        • Seats tally will remain unchanged
      • Depending on which of the above events comes true, stocks corresponding to that event will be worth Rs 100 while all others will expire at 0
      Invite Participants Open Market for trading Use information based on prices
      • All participants in this market will be given Rs. 10,000 in virtual currency using which they can trade these stocks
      • Participants are informed that whoever maximizes his/her portfolio will get some particular incentive when the market closes
      • Stocks are initially floated at a price of Rs 33.33 each (100/ number of outcomes) and the market is opened for trading
      • Depending on demand, which in turn depends on information about the actual political scenario, nominations, performance of UPA govt, prices of the various stocks will fluctuate. These prices will always add up to 100 giving a probabilistic estimate of each event occurring
      • As time passes, price of one stock will tend towards 100 while all others will tend towards 0
      • Once the market closes, whoever has maximized his returns, gets an incentive in cash or kind
      • Estimation of election outcomes
    • To implement such markets, simply decide on a key metric that you want to forecast and then let people trade on it’s expected outcome (2/2)
      • Say you want to encourage your employees to come up with innovative ideas for new products or cost-cutting methods or maybe process improvements
      Identify Objective Design Market
      • You allow anyone to float an idea which is represented as a stock on your internal market
      • All stocks will be initially floated at a price of Rs 50 each
      Invite Participants Open Market for trading Use information based on prices
      • All employees get a fixed amount of virtual money, say Rs 10,000 to invest in the various ideas
      • Once the market opens, based on everyone’s perception of the value of the ideas, prices of the stocks will start moving
      • There is a common online discussion forum where these ideas can be discussed and the proponent of the idea can defend his/her idea by offering clarifications or amendments based on the inputs received from others
      • After a pre-defined period of time, whichever idea/ideas have the highest stock price, are further explored by the management for their feasibility. Maybe the proponent of the idea is allocated some resources to develop a prototype of his/her idea
      • Also the traders who have the maximum portfolio value based on the current market price of the various stocks are given an incentive in cash or kind
      • Harnessing the potential of your employees – Idea Generation
    • Agenda
      • What are Prediction Markets?
      • Where can you use them?
      • Who is currently using such markets and for what are they using it?
      • How do you implement such markets?
      • What is the value of such markets ?
      • What are we offering?
    • Prediction markets provide an efficient mechanism to connect with the community
      • The real value of Prediction Markets goes beyond its forecasting accuracy. Running such a market will provide values in the following ways -
        • Provide a way to interact & receive feedback from the masses in an efficient manner.
          • Compare monitoring trading prices on some key metric (e.g. will a product meet quality standards) as opposed to reading reports, talking to scores of employees and holding meetings.
          • If you run public markets, then it can also provide you a way to connect and receive feedback from your customers
        • Gives users/participants a way to voice his/her opinion
        • Generate interest amongst the community on critical issues in a fun way
        • Getting the collective wisdom of the masses
    • Agenda
      • What are Prediction Markets?
      • Where can you use them?
      • Who is currently using such markets and for what are they using it?
      • How do you implement such markets?
      • What is the value of such markets ?
      • What are we offering?
    • MindHive will offer an end-to-end prediction market solution
      • Market design based on your specific needs
      • Prediction Market software as a managed service
      • Application hosting on our servers ensuring zero setup costs for you
      • Training of participants and users
      • Technical and operational support
    • Articles on Prediction Markets and its applications
      • Businessweek Magazine
        • http://www.businessweek.com/technology/content/aug2006/tc20060803_012437.htm
      • TIME Magazine
        • http://www.time.com/time/magazine/article/0,9171,1118373,00.html
      • New York Times
        • http:// www.innocentive.com/about/media/NYTimes_reprint.PDF
      • Accenture Research
        • http://www.accenture.com/Global/Research_and_Insights/Outlook/By_Alphabet/LeadingInvisibleHand.htm
      • CNN.com
        • http://money.cnn.com/magazines/business2/business2_archive/2006/09/01/8384339/index.htm
      • Wired Magazine
        • http://www.wired.com/wired/archive/12.06/view.html?pg=2
    • Want to know more – Contact us
      • Pune
      • Asutosh Upadhyay
      • 12 , Siddarth Enclave
      • Road No 10, Kalyaninagar,
      • Pune –
      • Mail: asutosh@gmail.com/asutosh@lordsofodds.com
      • Mobile: 91-9845226505
      • Fixed Line – 91-20-40040523
      • www.lordsofodds.com