Every senior executive knows that business decisions are seldom better than the information behind them. Yet although it is usually lower-level employees who interact directly with the customer, decision makers rarely ask them how, for example, new products will fare. Leaders therefore deprive themselves of information that could enrich their analysis and reduce the risk of ivory tower decision making.
Some executives understand that valuable information lies scattered around the organization but don’t know how to retrieve it. Others don’t even try, perhaps for hierarchical reasons or because they suspect they might get answers colored by the desire to second their real or assumed viewpoint.
Prediction markets might solve these problems. Initially a field of research, true prediction markets in essence are small-scale electronic markets, frequently open to any employee, that tie payoffs to measurable future events, such as sales data for a computer workstation, the number of bugs in an application, or a product’s usage patterns.1 Some companies, particularly in the high-tech sector, have adopted them in earnest, and a few major companies elsewhere are experimenting with them.
These markets yield prices on prediction contracts—prices that can be interpreted as market-aggregated forecasts. Their “collective wisdom” is usually at...