Can Prediction Markets Forecast Successful Innovations?

Can prediction markets forecast which ideas will become successful innovations?

Most large organizations have suggestions schemes which involve sharing ideas on an intranet social media site.  Here people can comment on ideas and vote for them.  But there is a problem with voting for ideas.  People can be lobbied to vote and they support the suggestions of friends and co-workers.  We see this often on the TV talent show X Factor.  People in Lancashire vote for the boy from Liverpool while people in Ireland vote for the girl from Dublin.  If people had to invest their own money in which singer had the better future surely they would be more inclined to select the best singer rather than their local favorite.  That is the principle which leads experts to believe that prediction markets work better than voting.

Prediction markets were popularized in James Surowiecki’s 2004 book, The Wisdom of Crowds.  They are systems which forecast the outcome of projects or events based on how willing individuals are to buy “stock” in them.  People buy shares in the topics they think will succeed.  Each topic or event then gets a value similar to a stock market price.  These prices can be interpreted as predictions of the likelihood of the event.

Companies such as Motorola have used prediction markets to engage employees in selecting and predicting which new product ideas will turn into winners.  According to Consensus Point who supply the Huunu Prediction Market package, Motorola have doubled the number of ideas pursued and significantly improved time to market.  Other users of the Consensus Point platform include Best Buy and Healthstream.

What makes prediction markets better at engaging employees than conventional suggestion schemes is the element of gamification.   Exago is an innovation consultancy which supplies a prediction market service with a strong games emphasis.  Participants get points to spend on ideas and they get additional points for suggesting ideas.  The values of their holdings increase if they back ideas which are turned into implemented innovations.   The points can be redeemed for personal prizes or corporate rewards such as attendance at prestigious external conferences or training sessions.  Exago’s clients include Roche, Fleury and Portugal Telecom.  Better selection of ideas is not the only benefit. Gamification leads to higher employee engagement and better inter-department understanding, co-operation and alignment.  Exago claims that employee participation in their schemes ranges from 20% to 70% which is well above average for large scale suggestion schemes.

It is not advisable to ask people to invest their ‘money’ in partly formed early ideas.  Suggestions need to go through some form of initial validation.  The more detail that can be attached the better able people are to judge.  So the proposal should be worked up into a short document with projected markets, revenues, risks, next steps etc.  People are asked to invest not in the ideas that they like most but the ones they think are most likely to succeed.  In this way the crowd quantifies the opportunity.

Crowds generally do better than experts.  On the Game Show, Who wants to be a Millionaire? contestants can phone a friend (an expert) or ask the audience (the crowd).  Statistics after many shows reveal that the friends were right some 60% of the time while the audience was right 90% of the time.  So do not rely solely on experts to evaluate your innovation pipeline of ideas.  Tap into the wisdom of your crowd with a prediction market.

image credit: comnetwork.org