A few weeks ago I had the opportunity to sit down in Boston with the Harvard Business Review and discuss how our corporate clients were using prediction markets internally. Lew McCreary, one of their Senior Editors wrote a brief blog post highlighting some of our discussion and touching on a sensitive but valuable use of prediction markets: institutional lie detection.
Harvard Business Review: How to Kill Bad Projects
We've long talked about fighting office politics and bringing transparency to information flow as part of the value proposition of prediction markets. Trying to bring reality or at a minimum understanding the current perception of forecasts and probabilities of risk, etc. ultimately helps with strategic decision making, being more proactive in addressing issues, etc.
The unspoken issue, however, and something we discuss regularly with potential clients is how to deal with the people part of the equation when someone may a) get some egg on their face based on the information being exposed, b) not agree with what the market is saying, or c) try to actively get people to trade a certain way to mask what may really be going on.
When this is raised, we usually respond back with a question of our own: Is it worse for someone to look bad in the short term or to have an entire initiative fail based on unrealistic deadlines and forecasts or unawareness of risks? In other words, does a manager want to know about a problem early, take their lumps, and work to rectify the situation (and be seen as an effective manager who can handle adversity) or do they want to mask problems until it's far too late and risk the possibility of getting fired? Personally, I'd take the first option.
As for the issue of collusion, the key lies in diversity of participants in the markets from different organizational units. Power centers in companies are typically localized to your own kind (unless you're truly one of the big dogs in the company.) A senior person in sales can probably get her minions to go along with her on something but the marketing, product development, and customer support folks who don't answer to this person are likely going to be independent actors who will blunt any concerted effort to manipulate the market. We see this all the time in our public marketplace in questions like: "Who will win Big 10 Player of the Year?" The market may get posted to certain team's discussion boards and you get a predominant number of people from a University taking long positions in their guy. But then other people start to come in who are more rationale players or who are biased towards other players and the market begins to normalize.
Of course a company could always run the market: "Who will try and get others to collude with them to manipulate the market?" and police themselves but this has about a 0% probability of going well, I imagine. :)