Crowdsourcing, the wisdom of crowds and collective intelligence are proven as highly effective means of aggregating and uncovering hidden information and insight on a continuous basis.
The use of crowdsourcing on internet sites has become known as prediction markets (as well as predictive markets, information markets, decision markets, idea futures, event derivatives, or virtual markets). Essentially prediction markets are exchanges trading in the outcome of events.
The economic theory behind prediction markets is credited to Ludwig von Mises in his "Economic Calculation in the Socialist Commonwealth" and Friedrich Hayek’s 1945 article "The Use of Knowledge in Society". Modern economists agree that Mises' argument when combined with Hayek's elaboration, is correct.
A classic demonstration of collective intelligence is the jelly-beans-in-the-jar experiment, in which the group’s estimate is invariably superior to the vast majority of the individual guesses. When finance professor Jack Treynor ran the experiment in his class with a jar that held 850 beans, the group estimate was 871. Only one of the fifty-six people in the class made a better guess.
Repeated studies attest the accuracy of the group aggregate decision with only 2-4% of individuals performing better than the group average.
Prediction markets have a long history. Betting on elections was common in the U.S in the early 20th century, with formal markets with volumes of multi millions of dollars and thousands of participants being run on Wall Street prior to elections. The markets reportedly had remarkable predictive accuracy.
A more recent example is the Iowa Electronic Markets which is a prediction market or information market where people buy and sell forecasts in electoral outcomes.
A study of the Iowa Electronic Markets’ performance in forty-nine different elections between 1988 and 2000 found that its election-eve forecasts were, on average, off by just 1.37 percent in the presidential elections, 3.43 percent in other U.S. elections and 2.12 percent in foreign elections, making Iowa Electronic Markets’ forecasts better and less volatile than surveys and opinion polls.
In 1990 Professor Robin Hanson developed the first known corporate prediction market during the hypertext project, Project Xanadu. Since that time many large corporates have experimented with prediction markets but there is currently no common commercial experience.
The U.S. Department of Defence launched a Policy Analysis Market in 2003 and suggested that future topics might include terrorist attacks. A congressional backlash was experienced and the program was widely criticised as a "terrorism futures market" leading to its cancellation.
An IARPA project took a group of 3,000 ordinary citizens armed with nothing more than an internet connection and aggregation software and found they were able to make better forecasts of global events than CIA analysts with special access to private information. The study found hidden experts, known as super forecasters, who would not normally have been identified. These super forecasters demonstrated an ability to outperform CIA analysts by 30%.
The research literature is collected together in the peer reviewed The Journal of Prediction Markets, edited by Leighton Vaughan Williams and published by the University of Buckingham Press.
There have been many attempts at trying to commercialise collective intelligence markets using the internet. The current range of prediction markets only scratches the surface of crowd judgement or collective intelligence.
Dysrupt Labs changes that.