Wednesday, July 29, 2015

When Intuition 'Trumps' Analysis

In growing my Inkling score from five thousand to ten million Inkles, one of the most important questions was related to the number of points each team would score in the most recent NBA season.  The question asked about the difference between each team's points and the average of all teams.  As I watched the question play out, I noticed that a couple power users were projecting that teams close to the current average would remain close (their values were low), but there also seemed to be a lot of volatility--teams' projections were constantly changing.  As a result I started forecasting upwards any time a team approached the average.  I didn't know what the forecast should be, but I felt pretty good saying it should be higher than where it was.  Eventually, I created a little Excel file to try to quantify my forecasts, assuming some volatility in their scoring, but mostly I was forecasting based on observation and hunch.

Note the shift in approach between intuition (fast, emotional, human) and analysis (rigorous, logical, quantitative).  Both intuition and analysis are really valuable when forecasting in prediction markets, and one of the key advantages of implementing a prediction market is that it leverages both types of thinking.  We tend to think of analytical approaches as being more accurate, especially when making important decisions, and in many cases they are.  I felt more confident in my Excel projections than my initial hunch.  But the accuracy gain was minimal and it took much longer to generate.  There was a lot of predictive value in my initial hunch, and ultimately the forecasts I made before doing any analysis did more for my score those I made after.

In other cases, analysis may actually lead you astray.  For instance, consider Donald Trump's presidential campaign.  When forecasting primary elections, the best analyses typically rely on candidates' polling average, and Trump is currently leading the polls.  Does that make The Donald The Front-Runner?  Prediction Markets say no, both ours and others, and I'm pretty confident they're right.  I also don't think it's rigorous analysis as much as people's intuition guiding the markets.

As a forecaster, it's important to learn when to rely on intuition versus analysis.  But as a prediction market administrator / consumer, what matters is that the market incorporates both intuitive and analytical approaches.  As a result forecasts and be fast, emotional, and human, while also being rigorous, logical, and quantitative.  Most importantly, they're highly accurate.

Ben Golden is a software developer, economist, and evangelist for Inkling Markets.  You can find him on Inkling Markets as benthinkin, and on Twitter, @BenGoldN.  Email him: ben at inklingmarkets dotcom

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