It’s been nearly four years since Time Magazine published “The End of Management?”, an article about the emergence of prediction markets. It’s been about that long since I heard Bernardo Huberman of HP labs talk at a Complexity and Social Networks Symposium directed by David Lazer. Also about that long since I was introduced to Art Hutchinson, whose blog, Mapping Strategy, includes many entries on prediction markets.

More recently, fellow blogger Jenny Ambrozek and her collaborator Vicky Axelrod published an article in Inside Knowledge Magazine, “Co-creating an organisation’s future“, McKinsey published “The promise of prediction markets: A roundtable,” and the New York Times writes, “Betting to Improve the Odds.”

Here on TheAppGap, prediction markets creep into our conversations but we haven’t brought them to the forefront: Jenny Ambrozek has speculates on how prediction markets might bring more diversity of opinions to geographically dispersed organizations. Jon Husband on Gaming and the Workplace of the Future suggests that video game technologies will enter the workplace; I see prediction markets as perhaps (though Jon may dispute me) an aspect of bringing gaming into the workplace.

All these weak signals got very loud last week, after I spent a morning (hosted by the aforementioned Art Hutchinson) with Maurice Balick of NewsFutures, and a number of concepts started resonating strongly. I can’t cover them all in one blog so am starting a series on some of the ideas that started meshing.

The basics of prediction markets are well covered in the various articles referenced above, and so I’ll just do a brief summary to kick off this series.

In its pure form, a prediction market works like a stock market (people buy and sell shares) in which the stock is a bet, which can be:

• An opinion about the probability of a particular event’s occurrence at a specific time. Will this product ship on its scheduled date?
• An opinion about a specific value of a forecast item. What are the estimated sales of a product? What should we price this product at?
• An opinion about the viability of a new product. What is the likelihood that this product will succeed in the marketplace?

The software applications that manage these markets inside companies tap into the “wisdom of crowds,” (as so beautifully exposited by James Surowiecki in his book by that name). Research and experience with these markets has shown that the aggregated opinion of employees (and sometimes of customers) is almost always more accurate than the forecasts of experts or senior managers. It enables those with marginal or distance voices in the organization to be heard, it leverages a potentially vast diversity of opinions and can shape the way that a company thinks. Note that these tools do not obviate the role of management in decision-making, but rather provide management with augmented intelligence to inform their decisions.

One of the notions that intrigues me so much about these applications (and there are more than I’ve suggested above) is that it enhances the potential for employee engagement and participation. John Seeley Brown has said that Web 2.0 is “a profoundly participatory medium.” Companies like Google and Best Buy have integrated prediction markets into their business processes, and many more companies are introducing them.

Yet, the AIIM Market IQ on Enterprise 2.0 shows that less than one third of survey respondents understand prediction markets, while the rest reported to be somewhat familiar (19%), vaguely familiar (22%) or having no idea (27%). The signals will continue to get stronger, and I think must, for these applications, brought into the enterprise, make for potentially profound employee participation and can perhaps bridge the social gaps between employees and management.