“Why Prediction Markets Beat Political Polls” is a headline on the cover of the March 2008 issue of Scientific American. The headline is a bit misleading because why or how prediction markets work is not all that clear. However, the fact that they outperform polls, based on the evidence of the Iowa Electronic Markets (IEM), is indisputable: The IEM example covering U.S. Federal elections between 1988 and 2004 demonstrates that markets beat polls 3 times out of 4. This is as true on the day of the election as it is 100 days in advance.

The basic distinction between polling and a prediction market, using the example of an election poll, is that the poll takes a representative sample to find out how the group is going to vote. Prediction markets allow a diverse group of people to predict (or bet) who’s going to win.

With risk-based regulation, there are times when the consequences of a wrong decision are high enough that a best guess isn’t good enough. Prediction markets, or information markets, as they are sometimes called, present a technique of tapping into the “wisdom of the crowds” to get a better reading. New types of markets can be developed to assist in regulatory decision making. Already, prediction markets have proven themselves in diverse areas such as disease forecasting, Hollywood box office success, and economic and financial forecasts.

More information

Information Markets: A New Way of Making Decisions. This document captures the proceedings of a 2004 regulatory conference about information markets. The conference was hosted by the “Reg-Markets Center,” officially the AEI Center for Regulatory and Market Studies (formerly known as the AEI-Brookings Joint Center).

Our review of Wisdom of the Crowds by James Suroweicki.

There’s a review in the November 8, 2007 New York Review of Books of a book by the Turkish Nobel laureate Oran Pamuk, Other Colors: Essays and a Story. The reviewer quotes from an essay by Pamuk:

It is by reading novels, stories, and myths that we come to understand the ideas that govern the world in which we live; it is fiction that gives us access to the truths kept veiled by our families, our schools, and our society; it is the art of the novel that allows us to ask who we really are.

In another section, the reviewer again quotes Pamuk, “an imaginative novelist … can look directly into the center of things the way that only children can.” The child’s view is unconditioned by adults who may not see the obvious, or if they see it may have good reasons for keeping quiet about it. You’ll recall in the story of the Emperor’s Clothes that it was a child that revealed the veiled truth about the not so veiled Emperor, that he was buck naked. (more…)

This is a book that offers the opportunity of an education. There are so many interesting tangents — they’re a bit like hyper-links that’ll take you into another world, the world of someone who has thought deeply and has experienced a life that’s anything but average. And to be sure this book is not about what’s average.

Nassim Nicholas Taleb argues that history is dominated not by the predictable but by the highly improbable. Before Europeans discovered the black swan in Australia, the world in the northern hemisphere believed there were only white swans. In fact, the expression “it’s a black swan” was a way to make a point about something being impossible. However, improbable and consequential events do exist outside our normal spheres of reference. Understanding the kind of impact these events can have on your plans, for good or bad, and being prepared is the central argument of this book. Taleb offers good advice. (more…)

There are lots of gray areas in professional regulation - gaps and overlaps in legislation within and across professions and different rules from one jurisdiction to the next. Now software is presenting some new and different challenges. (more…)