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December 23, 2005
Prediction Markets: A better way to predict project outcome
Last week's The Economist has an interesting statement on technology prediction markets:
"...Microsoft says the software giant has run a dozen or so such [prediction] markets, and that they quickly and cheaply capture employee sentiment on project deadlines or software quality more accurately than any other measure."
Google also uses prediction markets.
Prediction markets are financial exchanges where the participants purchase futures contracts that pay an amount when an event occurs. The Iowa Electronic Market (IEM), for example, allows you to buy a contract that pays out if a particular candidate wins the US presidential election. If the market price for a Bush 2004 win contract that pays that out $10 is $5, that means the market thinks it's a 50% chance. If you think Bush has better than 50% chances, you should by the contract.
The IEM's and, more recently, Tradesports.com's predictive abilities are very good. Studies have shown IEM to be more accurate than any public opinion poll, and Tradesports.com market predicted 49 of 50 states correctly in the 2004 US presidential election.
Why should this work to predict software project outcomes? There are to key factors: profit incentive and insider knowledge. Profit motive means people are much more motivated to predict the outcome accurately because their own money is on the line.
Second, and more importantly, is insider knowledge. Traditional project reporting and prediction is done by management, sometimes without the team's full input. A prediction market, however, allows rank-and-file team members -- many who know the project's status well -- to assert their opinion by trading contracts.
For example, if you know that management's expectations for delivery are overly optimistic, as is often the case, you could sell contracts that say the project will be done on time and buy futures that say it will finish late. This would lower the price of the "on time" contract and indicate to management that there is pessimism about meeting the deadline.
Another detail: the same article says that a prediction market run by O'Reilly and Yahoo! indicated in spring that Ruby on Rails and Flickr were hot technologies. Not bad!
Links:
Wikipedia on prediction markets
The Economist on technology prediction markets
Posted by gsmith at December 23, 2005 03:03 PM