QRCA Views

of the stock was low and the play-it-safe investors were putting their points into known entities like Facebook or Amazon, you would gain far more than if you invested in it a week later, after the market had already coalesced around the phablet and its value was higher. So while the transparency of a prediction market may initially encourage some "me, too" behav- ior, investors quickly learn that they stand to benefit more by boldly taking a stand (through both the timing and the quantity of their investment) and trusting that oth- ers in the market will follow their lead. There are two more dimensions along which prediction markets differ from conventional methodology. First, inves- tors need not respond to every question. They invest only in outcomes about which they have a strong point of view, thereby eliminating the "indifference bias" that so often creates false signals in research. And because they are invited to invest against an outcome, not just for it – for example, putting a lot of points into the prediction that Product A will not do well among four-to six-year old girls – they get to not only reward good ideas but also kill bad ones early as well. (Why) Do Prediction Markets Work? For the past three years, a group of about 3,000 ordinary citizens have been making predictions about local and inter- national events that are, according to a recent National Public Radio report, gen- erally more accurate than professional intelligence analysts. And since 1988, the University of Iowa has used prediction markets to forecast election outcomes. The success of this approach has been proven in the commercial space as well. Many major companies, including Hewlett-Packard, Motorola, Intel, Best Buy, Microsoft, Google, and Pfizer Animal Health, have employed internal prediction markets (where the traders are employees) to assess everything from likely product shipment dates to sales fig- ures. And parallel studies by Communispace, BrainJuicer, and other research firms have proven consumer prediction results equal or out-perform those of other methods. For researchers, prediction markets provide much more nuanced qualitative information than do surveys and more informative quantitative outputs than focus groups possibly can. For example, you can immediately tell which concepts are polarizing because you'll see that they generate significant quantities of both positive and negative investment. You can see which ones are most differentiated and attract the greatest passion, based on both the number of unique investors they attract and the size of the average invest- ment. And through the public discussion and debate around investments, you can see which arguments are persuasive to other investors and why. While these dis- cussions are comparable in form to those in any online discussion forum, they have the added benefit of helping you infer the tangible impact of a posting, based on whether it's followed by a surge in buying or selling. For participants, the gaming elements of prediction markets and the heady combination of risk and reward combine to offer an opportunity to compete, to improve, and to receive reward and status for doing so. As a result, participants are far more emotionally and intellectually engaged than when simply asked what they do and don't like and why. After all, today's consumers are able to express themselves in multiple venues and ways – from posting product reviews and Pinterest pictures to creating and sharing their own videos. They will no longer set- tle for being "respondents," nor should we ask them to. Instead, we can use predic- tion markets to harness consumers' energy and expertise to the design and marketing of the products and services they'll ulti- mately be asked to buy. That's a game everyone wins. "The underlying theory is that the whole is greater than the sum of its parts, that even if a given individual's knowledge is incomplete or biased, aggregated collective knowledge is not." "… participants are far more emotionally and intellectually engaged than when simply asked what they do and don't like and why." Put Your Money Where Your Mouth Is C O N T I N U E D 52 QRCA VIEWS WINTER 2 014 www.qrca.org

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