McKinsey & Company on prediction markets
April 15th, 2008
McKinsey & Company, the famed consulting firm, recently published a roundtable interview in its McKinsey Quarterly on prediction markets. The eleven-page article (click here to access) featured a discussion with Bo Cowgill of Google, James Surowiecki, Jeff Severts of Best Buy, and Todd Henderson (an ex-McKinsey consultant).
Some of the article had the standard “what is a prediction market” explanation. (A quick reminder that you can watch my video which explains the same thing here.) But I want to point out a number of interesting notes/quotes:
- Best Buy is rapidly catching up to Google in terms of the size of the prediction market effort. At the time of the interview, Google had run 275 markets with about 80k trades since April of 2005. Best Buy had run 147 markets with 70k trades, and involved 2,000 traders. (I believe they have been active since late 2006 or early 2007.) I wrote about the Best Buy initiative after a presentation at the ConsensusPoint New York prediction market conference. While they haven’t moved quite as fast as was mentioned there, Best Buy looks to be a strong champion of prediction markets.
- Jeff Severts of Best Buy initially started doing better forecasting with a simple survey. While not as sophisticated as a prediction market (and more time consuming to calculate averages for the forecast), it generated much better forecasts than the business had ever done before. These experiences showed that they could go further with the idea.
- Bo Cowgill at Google is clearly doing the most advanced work with the underlying prediction market data. They’re the only company that I know of that looks into the underlying organisational dynamics that prediction market data can provide. (We’ve had a bit of a blog conversation about this a few weeks back.)
- Jeff Severts also noticed that any forecasts they had done about their main competitor were not very accurate. I think this speaks to a lack of diversity amongst individuals in a company when critically examining a “competition” in which they’re involved, and similar to the optimism that Bo noted that some Google traders exhibited toward similar Google markets.
- From Bo, traders were more accurate the longer they participated, and tended to be more profitable the lower they were on the org chart.
- I intend to discuss this in more detail later, but James Surowiecki brought up that it is still an open question if prediction markets “are good at forecasting genuinely discontinuous innovations or leaps.”
- Jeff of Best Buy mentioned that “support from very senior executives is essential if you want to issue contracts on anything that might be controversial.” Particularly in traditional companies, I wholeheartedly agree. While less senior executives can make good prediction markets happen within their organisational purview, any company-wide markets need the senior executive “air cover.”
- One thing that I always try to tell people when discussing prediction markets (including in the video), is that they’re really a new way to communicate within a company. I really appreciated Jeff Severts when he said:
Smartly applied, this tool can help management listen to voices, throughout the company, that otherwise go unheard.
This is a great quote, and I believe a very wise way to think about the benefits of a prediction market.
It’s great to see a well-respected company such as McKinsey publish information on prediction markets widely. This is yet another positive step toward companies viewing prediction markets as mainstream tool, and provided some interesting insights into some of the top active prediction markets operating today.
