Prediction Markets: Distilling Collective Wisdom

Robert S. Erikson, an economist at Columbia University, compared the accuracy of the Iowa Electronic Markets to that of public opinion polls during the 200 days leading up to the previous five presidential campaigns.

Though his research found that the IEM's predictions were almost always closer to the eventual election vote percentages, the polls fared better if they were adjusted for factors that participants usually miscalculated, such as the incumbent's early advantage. He concluded that polls, combined with the knowledge of an experienced pollster, could outperform prediction markets...

However, in spite of support for the concept, not many people outside the scientific community knew about prediction markets and how they operated. This to many, was a major challenge in establishing prediction markets. "The biggest obstacle [to the acceptance of prediction markets] is that most people don't know what a prediction market is," said Shiau.

Another potential roadblock to the more widespread use of prediction markets, especially in the corporate world, was that the people who controlled the decision-making process and/or were responsible for taking decisions in an organization, could prove unwilling to relinquish their control over information...