[ An Introduction To Prediction Markets ]

Transcription

1 [ An Introduction To Prediction Markets ]

2 2 Fewer than 10% of all new products/services produce enough return on the company s investment to survive past the third year. As a market researcher that regularly works with clients on new product and concept development, it s my job to help clients make it into that 10%. Numerous market research methodologies aid these predictions monadic testing, behavioral response or direct-response advertising tests, purchase-intent surveys and qualitative discussions. All have merits, but a new option, Prediction Markets, has been emerging and has proven very promising. In 2011, the global research firm Forrester recommended the use of Prediction Markets and stated they will serve a niche but critical role during the innovation process. Given that endorsement, advances in the area and the success some large, noted companies have experienced, I thought it was time to take a look at the role Prediction Markets could play for my clients. This e-book will give you an overview about Prediction Markets and why they work, and introduce you to a platform called HuuNu with whom I have partnered. HuuNu includes a qualitative component that adds an extra dimension not found in similar platforms that I have researched. If you would like to discuss how Prediction Markets could work for you, please give me a call at or me at snyderp@mindspring.com. Pat Snyder

3 PREDICTION MARKETS DEFINED 3 The purpose of a Prediction Market is to anticipate the likely success of a product, idea or political candidate. A Prediction Market is a platform that collects and aggregates the knowledge and judgment of a random, diverse group around a specific event or concept for the purpose of making predictions. The predictions represent the aggregated knowledge of the group and quantify the probability of future outcomes. Based on the wisdom of crowds, as developed by James Surowiecki, author of Wisdom of Crowds, Prediction Markets confirm the concept that large groups of people are smarter than an elite few, no matter how brilliant better at solving problems, fostering innovation, coming to wise decisions, even predicting the future. COMPONENTS ESSENTIAL TO SUCCESS According to Surowiecki, in order for a crowd to be smart, there are four conditions that need to be present: 1. Diversity. A group with many different points of view will make better decisions than one where everyone knows the same information. Think multi-disciplinary teams. 2. Independence. "People's opinions are not determined by those around them." 3. Decentralization. "Power does not fully reside in one central location, and many of the important decisions are made by individuals based on their own local and specific knowledge rather than by an omniscient or farseeing planner." 4. Aggregation. You need some way of determining the group's answer from the individual responses of its members.

4 4 The concept of the Wisdom of Crowds has been researched since the 1920s, and perhaps even earlier. Many experiments have been conducted by sociologists and found the principle that large groups are in fact smarter as a group than individuals. Perhaps one example, although not necessarily scientific, that demonstrates this concept and mentioned in the Wisdom of Crowds, is from a recent popular television game show. If you ever watched the TV show Who Wants To Be A Millionaire, you are aware that a contestant had several safety nets: a multiplechoice answer option; call a friend/expert; or poll the audience. The expert got the answer right 65% of the time while those in the studio audience got it right 91% of the time.

5 5 WHEN TO USE PREDICTION MARKETS Concept Testing/Market Preference Attitudinal Behavior Motivators Product Design Message/Ad Campaign Name/Logo Competitive Intelligence Forecasting Pricing Business Intelligence HOW DOES IT WORK? Prediction Markets offer a gamification element that helps participants become more invested in the quality of their response and more engaged in the research itself. Much like a traditional stock market, Prediction Market participants invest points or play money to support their answers. Players invest, or choose not to invest, based on their knowledge and confidence of a given subject.

6 HuuNu, the platform I have chosen to use, is different from traditional research in a number of ways: 6 HuuNu produces a consensus score as well as spread charts that detail the amount of positive and negative sentiment, and produces further detail through demographic spread charts. The spread analysis provides further insight into each concept and identifies any potential anomalies in trading behavior. Participants are not asked their opinion, but asked to make a judgment on a future outcome or preference. Research has shown that most people are far more adept at predicting what others will do than they are at predicting what they themselves will do. Participants are incentivized and rewarded based on their performance, not just their participation. Participants move the stock price based on their knowledge and confidence in the subject. An added benefit is it collects quantitative and qualitative feedback from participants in the same platform, providing additional insights into their judgment.

7 7 IS IT ACCURATE? Using Prediction Markets in this last presidential election, both the Iowa Electronics Markets and the Intrade Market correctly predicted Obama s win months before the actual election. Prediction Markets are especially interesting in this case because not only were they accurate, they had less variation than one might expect. If the crowd can predict presidential election results, why not which product is most likely to succeed, or which advertising campaign will have the most impact?

8 8 TOP FOUR BENEFITS OF USING PREDICTION MARKETS 1. Richer Research Results HuuNu provides clear quantitative data backed by rich verbatim comments. 2. Cost savings Recruiting target market customers, especially if the incidence is low, can be very costly. Beyond recruitment costs, traditional concept testing requires large sample sizes. Prediction Markets use a general population sample, thereby reducing the overall cost of the research. 3. Faster Timetable Depending on factors such as the size of the target market of customers and the number of concepts evaluated, traditional concept testing can range anywhere from three weeks to eight weeks or more. Using general consumers and the streamlined approach of evaluating concepts within a Prediction Market, project timing can be completed in as little as 2 days. 4. Increased Participant Engagement Decreasing level of participant engagement is becoming more common. Gamification adds a new level of interest and engagement to research.