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The Internet’s Ability to Predict the Future

December/January 2005/2006

How much is an opinion worth? It depends on how smart and informed the person is who holds it. My opinion is worth quite a lot. Ha ha.

Actually, it turns out that no matter how smart or well informed an expert is, the aggregated opinion of a group of people tends to be more accurate.

Examples abound. The collective opinion of a group of people correctly predicted the winner of the vote for president in all 50 states in the last election, as well as 33 out of 34 Senate races.

In 2002 a group of people accurately picked 35 out of the eventual 40 Oscar nominees. And in December of 2003, two days before the capture of Saddam Hussein, collective opinion indicated his capture was imminent.

How were these opinions aggregated? By public opinion polls? Nope. The Internet, of course.

At first the Internet was primarily a way of accessing information. Then increasingly it’s become a medium of social interaction — think of Skype, or personal networks, chat groups, forums, and more.

Now something new seems to be happening. Mechanisms are arising that allow a sort of collective intelligence. It’s now possible to combine the intelligence, insight, or opinions of thousands of people to make accurate predictions.

What’s the specific mechanism for this new collective intelligence? It is, well, ah, very prosaic. It’s betting.

The highfalutin terms for it are “decision markets” or “prediction markets.” These markets have affinities with sports betting and financial markets, but the categories topics are quite different: InTrade’s categories include Current Events, Financial, Legal, and Politics.

Let’s take a look at the 2008 presidential race on InTrade. Right now the odds favor Hillary Clinton’s winning the Democratic nomination. Her “futures contract” is going for around $45, which, as I understand it, means that right now the market thinks she has about a 45% chance of winning the nomination. The futures contract for Mark Warner, the next highest, is around $10.

InTrade was the market that did so well predicting the outcome of the last presidential election — much more accurately than any of the public opinion polls. However, I believe the first market to cover presidential elections was the Iowa Electronic Markets (), which began in 1988 as a project in a management class at the University of Iowa. Since its inception, 75 percent of the time it has been more accurate in predicting the outcome of the presidential race than public opinion polls.

The Hollywood Stock Exchange was the market that made the accurate forecast, noted above, of the Oscar nominees. Here you can bet on how well current and upcoming releases will do at the box office, among other things. According to the book The Wisdom of Crowds, while the Hollywood Stock Exchange’s forecasts aren’t as accurate as the Iowa Electronic Markets’ prediction of election outcomes, the price that a particular futures contract is trading at just before a movie opens on Friday has been shown to be the single best indicator of how well that movie will do at the box office that weekend.

While InTrade, the Iowa Electronic Markets, and other exchanges use real money (with your investment being capped at $500 on the Iowa market) the Hollywood Stock Exchange uses “Hollywood Dollars” and gives you a stake of $2 million to get started. Even so, the Hollywood Exchange is more than a novelty, given its relative accuracy. Having a sense for how well a film will do is extremely important in Hollywood. The company that founded the Hollywood Stock Exchange now markets its data to Hollywood executives.

And corporations are starting to catch on, but very slowly. The business world depends on having an accurate sense of the future, and prediction markets can help — often being a better resource than the projections from analysts and experts. Time magazine reported that Google is using an internal market to predict the date when specific products will be ready to launch.

Why would a market work better than Google’s own executives? Because it has all the criteria for collective intelligence: everyone in the company can bet, from the top execs to the guys sitting doing to coding; no one’s opinion counts more than another’s; and people are betting anonymously, insuring their honest opinion.

So how much is your opinion worth? Well, now you can find out in a very direct way. Head on over to InTrade and see how you do. Have fun, earn a profit — and contribute to the collective intelligence.

© 2005 by Jim Karpen, Ph.D

E-mail Jim Karpen