Prediction mrkets: A newtool for strategic decision making

California Management Review

Volumn 52, Issue 4, 2010, Pages 125-141

  Borison, Adam ^a,b   Hamm, Gregory ^a,c  

^a NERA   (United States)

^b Agni Corporation   (United States)

^c Alameda Municipal Power   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 77956317380     PISSN: 00081256     EISSN: None     Source Type: Journal    
DOI: 10.1525/cmr.2010.52.4.125     Document Type: Article

References (47)

1. Adrian J. Slywotzky, The Upside: The 7 Strategies for Turning Big Threats into Growth Breakthrough (New York, NY: Crown Publishing Group, 2007), p. 24.
2. Don Van Natta, Jr., and David Johnston, "A Nation At War: Banned Weapons," New York Times, April 14, 2003.
3. Maj. Ernest Y. Wong and Lt. Col. Rod Roederer, "Should the US Have Attacked Iraq? Can Decision Theory Shed Light on Polarizing Debate?" OR/MS Today (December 2006).
4. For an example of combining judgment and data from model results, see Robert C Blattberg and David J. Hoch, "Database Models and Managerial Intuition: 50% Model + 50% Manager," Management Science, 36/8 (1990): 887-899.
5. For a discussion of methods for combining statistical data and judgment in the context of time series forecasting, see M.J. Lawrence, R.H. Edmundson and M.J. O'Connor, "The Accuracy of Combining Judgmental and Statistical Forecasts," Management Science, 32/12 (December 1986): 1521-1532;
6. J. Scott Armstrong and Fred Collopy, "Integration of Statistical Methods and Judgment for Time Series Forecasting: Principles from Empirical Research," International Journal of Forecasting, 21 (1998): 69-293
7. J. Edward Russo and Paul J.H. Schoemaker, Decision Traps: The Ten Barriers to Brilliant Decisions and How to Overcome Them (New York, NY: Simon & Schuster, 1989).
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9. For a more in-depth discussion of biases, see A. Tversky and D. Kahneman, "Judgment under Uncertainty: Heuristics and Biases," Science, September 27, 1974, pp. 1124-1131.
10. For more information on probability encoding, see Daniel G. Brooks and Timothy J. O'Leary, "A Comparison of Encoding Techniques," OMEGA: The International Journal of Management Science, 11/1 (1983): 49-55;
11. Carl S. Spetzler and Carl-Axel S. Stael von Holstein, "Probability Encoding in Dedsion Analysis," Management Science, 22/3 (November 1975): 340-358;
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13. Spetzler and Stael von Holstein (1975), "Encoding Subjective Probabilities: A Psychological and Psychometric Review," Management Science, 29/2 151-173.op. cit.
14. Ali E. Abbas, David V. Budescu, Hsiu-Ting Yu, and Ryan Haggerty, "A Comparison of Two Probability Encoding Methods: Fixed Probability vs. Fixed Variable Values," Decision Analysis, 5/4 (2008): 190-202.
15. Robert L. Winkler, "Scoring Rules and the Evaluation of Probabilities," TEST, 5/1 (June 1996): 1-60.
16. For more on expert aggregation, see Robert T. Clemen and Robert L. Winkler, "Combining Probability Distributions from Experts in Risk Analysis," Risk Analysis, 19/2 (April 1999): 187-203;
17. Daniel Osherson and Moshe Y. Vardi, "Aggregating Disparate Estimates of Chance," Games and Economic Behavior, 56/1 (July 2006): 148-173;
18. Thomas S. Wallsten, David V. Budescu, Ido Erev, and Adele Diederich, "Evaluating and Combining Subjective Probability Estimates," Journal of Behavioral Decision Making, 10/3 (1997): 243-268.
19. Robert T. Clemen and Robert L. Winkler, "Aggregation of Expert Probabilities," in Advances: Aggregate Probabilities (Draft), 2006, chapter 9.
20. Tversky and Kahneman (1974),"Aggregation of Expert Probabilities," in Advances: Aggregate Probabilities (Draft), op. cit.
21. Elizabeth F. Loftus, "Eyewitness Testimony: Psychological Research and Legal Thought," Crime and Justice, 3 (1981): 105-151.
22. Colin F. Camerer and Eric J. Johnson, "The Process-Performance Paradox in Expert Judgment: How Can Experts Know So Much and Predict So Badly?" in K.A. Ericsson and J. Smith, eds., Towards a General Theory of Expertise: Prospects and Limits (New York, NY: Cambridge Press, 1991), pp. 195-217.
23. P.E. Tetlock, Expert Political Judgment: How Good Is It? How Can We Know? (Princeton, NJ: Princeton University Press, 2003).
24. William R. Ferrell, "Discrete Subjective Probabilities and Dedsion Analysis: Elicitation, Calibration, and Combination," in G. Wright and P. Ayton, eds., Subjective Probability (New York, NY: John Wiley and Sons, 1994), pp. 411-451, at p. 448.
25. Glenn J. Browne, Shawn P. Curley, and P. George Benson, "Evoking Information in Probability Assessment: Knowledge Maps and Reasoning-Based Direct Questions," Management Science, 43/1 (January 1997): 1-14.
26. Roger Cooke, Experts in Uncertainty: Opinion and Subjective Probability in Science (Oxford: Oxford University Press, 1991).
27. Vicki M. Bier, "Challenges to the Acceptance of Probabilistic Risk Analysis," Risk Analysis, 19/4 (August 1999): 703-710.
28. Henry Wade Rogers, The Law of Expert Testimony (St. Louis, MO: Central Law Journal Company, 1891).
29. D.H. Kaye, "The Laws of Probability," in Peter Murphy, ed. Evidence, Proof, and Facts: A Book of Sources (Oxford: Oxford University Press, 2003), pp. 529-546.
30. Granger Morgan and Max Henrion, Uncertainty: A Guide to Dealing with Uncertainty in Quantitative Risk and Policy Analysis (Cambridge: Cambridge University Press, 1992), p. 137.
31. For an excellent review of this approach, see Justin Wolters and Eric Zitzewitz, "Prediction Markets," Journal of Economic Perspectives, 18/2 (Spring 2004): 107-126.
32. For a discussion of design variations and their impact on market information-gathering performance, see Charles Plott, "Markets as Information Gathering Tools," Southern Economic Journal, 67/1 (July 2000): 1-15.
33. James Surowiecki, The Wisdom of Crowds: Why the Many are Smarter than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations (New York, NY: Doubleday, 2004).
34. Renee Dye, "The Promise of Prediction Markets: A Roundtable," McKinsey Quarterly, 2 (2008): 84-93.
35. Clear evidence of current enthusiasm over the potential of prediction markets for strategic dedsion making includes recent articles by Teck-Hua Ho and Kay-Yut Chen in California Management Review (Ho and Chen, 2007),
36. The Economist (2009), the McKinsey Quarterly (Dye, 2008) and Risk (Patel, 2006).
37. Additional evidence is provided in Teck-Hua Ho and Kay-Yut Chen, "New Product Blockbusters: The Magic and Sdence of Prediction Markets," California Management Review, 50/1 (Fall 2007): 144-158;
38. "An Uncertain Future: Prediction Markets," The Economist, February 28, 2009, p. 68;
39. Dye (2008),"An Uncertain Future: Prediction Markets," The Economist, p. 68 op. cit.;
40. Navroz Patel, "Deciding on a Future," Risk, 19/2 (February 2006): 33-35;
41. Peter A. Coles, Karim R. Lakhani, and Andrew McAfee, "Prediction Markets at Google," Harvard Business School Case #607088-PDF-ENG, May 30, 2007.
42. For a comparison of prediction markets and the Delphi method, see Kesten C Green, J. Scott Armstrong, and Andreas Graefe, "Methods to Elicit Forecasts from Groups: Delphi and Prediction Markets Compared," Foresight: The International Journal of Applied Forecasting, 8 (Fall 2007): 17-20.
43. Joyce E. Berg, Forrest D. Nelson, and Thomas A. Rietz, "Prediction Market Accuracy in the Long Run," International Journal of Forecasting, 24/2 (April-June 2008): 285-300.
44. Kay-Yut Chen and Charles Plott, "Information Aggregation Mechanisms: Concept, Design, and Field Implementation for a Sales Forecasting Problem," California Institute of Technology Social Science Working Paper 1131, March 2002.
45. David M. Pennock, Steve Lawrence, C Lee Giles, and Finn Arup Nielsen, "The Real Power of Artificial Markets," Science, 291, February 9, 2001, pp. 987-988 (letters).
46. R.H. Thaler, ed., Advances in Behavioral Finance (New York, NY: Russell Sage Foundation, 1993).
47. R.H. Thaler and W.T. Ziemba, "Anomalies: Parimutuel Betting Markets: Racetracks and Lotteries," Journal of Economic Perspectives, 2/2 (Spring 1988): 161-174.