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50 QRCA VIEWS WINTER 2 014 www.qrca.org Put Your Money Where Your Mouth Is C O N T I N U E D with a numeric "consensus score." This score ultimately represents the probabili- ty that it will come to pass. In most pre- diction market platforms, an individual's "net worth" – the point value of their "portfolio" – rises or falls based on the accuracy of their predictions, regardless of whether that accuracy is rooted in their intuition, personal experience or demographic, or "objective" knowledge. This intrinsic reward of potentially gain- ing points is often augmented by extrinsic ones; Communispace, for example, offers prizes to players based on both participa- tion and on gains in the value of their predictions. More engaging than traditional sur- veys, more scalable than focus groups, prediction markets offer a unique and reliable way for companies to get con- sumer input and predictions at every stage in the product or service life cycle. They can be used for narrowing the new product development funnel, concept testing, forecasting, pricing, message optimization, and promotion testing. Just as important, they elevate the role of the consumer (and potentially, the employee) from "respondent" to active partner and collaborator. Breaking the Rules of Traditional Research As you may have gleaned, a prediction market is a method that encourages prep- aration, rewards influence, and has other attributes that have traditionally been anathema to market research. For starters, the methodology does not favor homogeneity among participants. Unlike traditional concept tests where you try to assemble a representative sam- ple of likely consumers, a prediction mar- ket favors diversity in the participant pool. The underlying theory is that the whole is greater than the sum of its parts, that even if a given individual's knowl- edge is incomplete or biased, aggregated collective knowledge is not. For example, I no longer have young children at home and would thus be excluded from research conducted by a toy company or theme park. Though I don't belong to the parents-of-young-kids demographic, the fact is that I work and converse with dozens of people who do and have grandchildren and aren't shy about expressing their enthusiasms. I have knowledge that I could bring to bear, if given the opportunity. That's why noted statistician Nate Silver writes in The Signal and the Noise, "Quite a lot of evidence suggests that aggregate or group forecasts are more accurate than individ- ual ones, often somewhere between 15 and 20 percent more accurate depending on the discipline." Of course, this only works if you loos- en the constraint of focusing exclusively on personal preferences and intentions. That's why rather than asking, "What do you like?" or "What are you likely to do?" a prediction market asks, "What is going to happen?" A wealth of psychological and statistical theory suggests that people often reveal more about themselves when asked to predict the behavior of others than when asked to anticipate their own actions. Just as in the stock market, peo- ple can and will invest in their predic- tions about the behavior of others based on their confidence in the outcomes. This often results in a truer picture of what is likely to have value in the real market. Prediction markets also break with the model of the isolated respondent answer- ing in a bubble, untainted by the views of others. On the contrary, participants can see how specific predictions are faring in the market – whether their value is rising or falling – and even adjust their own investments based on these develop- ments. But simply following the crowd is rare- ly a winning strategy. To go back to our earlier example, if you'd invested early and heavily in phablets, while the value "More engaging than traditional surveys, more scalable than focus groups, prediction markets offer a unique and reliable way for companies to get consumer input and predictions at every stage in the product or service life cycle."

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