Predicting Prediction Markets

"Over the last few years, Intrade — with headquarters in Dublin, where the gambling laws are loose — has become the biggest success story among a new crop of prediction markets. Another company, Newsfutures, helps the world's largest steel maker, Arcelor Mittal, run an internal market on which executives predict the price of steel. At Best Buy, a company called Consensus Point has helped start a market for employees to guess which DVDs and video game consoles, among other products, will be popular. Google and Eli Lilly have similar markets. The idea is to let a company’s decision-makers benefit from the collective, if often hidden, knowledge of their employees….

In every case, the market price reflects the sum of the traders’ knowledge — about the extent of the housing bubble in Los Angeles, for instance, or the likely size of next year’s wheat crop. This market price usually ends up being a more reliable forecaster than any individual, even an expert, can be. In a nifty 2004 book, James Surowiecki gave the phenomenon a catch phrase: “The Wisdom of Crowds.”

N. Gregory Mankiw, a former adviser to President Bush, who has written about Intrade on his blog, explains it this way: “Everybody has information from their own little corner of the universe, and they’d like to know the information from every other corner of the universe. What these markets do is provide a vehicle that reflects all that information.”

- Odds Are, They’ll Know ’08 Winner

Related;
Prediction Markets in Theory and Practice- Justin Wolfers
A Discussion With Justin Wolfers (podcast)
Predict the Oscar Winners
Bloomberg Discussion podcast
Guessing games
Information Markets: A New Way of Making Decisions
Using Information Markets to Improve Public Decision Making

Prediction Markets Blog