Harnessing Collective Intelligence

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Harnessing Collective Intelligence

During the years 1996 through 1999, two researchers at Hewlett-Packard performed an experiment.  They created a stock market in which employees could place bets that were essentially sales forecasts.  According to Kay-Yut Chen and Marina Krakovsky in their new book Secrets of the Moneylab,1 the crowd of people placing those bets turned out, collectively, to beat official sales forecasts six out of eight times.  This type of collective intelligence has been the subject of research for a long time.

In 1906, the polymath Francis Galton happened to be at a fair where a contest was being held.  An ox was on display and the public was invited to guess its weight.  The guesses were all over the place and none very accurate.  But when Galton calculated the mean of almost 800 guesses, he got the figure 1,197 pounds.  The ox actually weighed 1,198 pounds. 

During the 1940s, there were markets operating on Wall Street in which people could place bets on political elections.  With millions of dollars in volume, they were very accurate in their predictions. 

In more recent times, this effect has been harnessed in what are known as prediction markets.  They are essentially run like a stock market, where players make predictions and place bets.  One of the earliest was the Iowa Electronic Market at the University of Iowa.  It accepts bets on the outcomes of political elections and economic indicators.  Compared with polls, the predictions of elections by the Iowa Electronic Market have been extremely accurate.

The Hollywood Stock Exchange, established in 1996, predicts the performance of movie actors, directors, and others in the film industry.  In 2006, it successfully predicted 32 of the 39 Oscar nominations, and seven out of eight of the winners in the top categories. 

In fact, two sports prediction markets, NewsFutures, which uses play money, and Tradesports, which uses real money, performed equally well when predicting the outcome of National Football League games.  Real money didn't improve performance. 

Hewlett-Packard is developing a commercial prediction market that it's calling BRAIN, for Behaviorally Robust Aggregation of Information Networks.  Intel is using a prediction market to predict manufacturing capacity, according to the Harvard Business Review.  Microsoft uses prediction markets within the company, as does Google. 

According to The Wall Street Journal,2 General Electric generates new business ideas using a commercially-available prediction market software from a company called Consensus Point.  Numerous other corporations are using commercial prediction markets for various applications, from choosing a marketing campaign to predicting a hit song...

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