So, what, exactly, is a prediction market?
A prediction market is a speculative market that harnesses the power of the “wisdom of crowds” for the purpose of making predictions. The advantage of this method is that it doesn’t rely on asking individuals to make predictions about what they will do in the future, but rather what they think other people will do.
This concept of prediction markets was addressed in James Surowiecki’s best-selling book, The Wisdom of Crowds. Surowiecki demonstrated how a diverse group of individuals is able to make decisions and predictions better than individuals in isolation or even better than experts, claiming 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.”
Market researchers take this theory one step further by “gamifying” the process of tapping the wisdom of crowds. Researchers enable people to put their (play) money where their mouths are, to invest in their own predictions about the behavior of others (as opposed to what they themselves would be likely to do). This results in more accurate answers, a truer picture. This is further supported by a body of social psychology literature that proves people are better social psychologists than self-psychologists, more accurately predicting the actual behavior of others, not themselves.
How does it work?
Prediction markets work similarly to the stock market. Consumers are asked to “predict the success” of various concepts or ideas (or really just about any stimulus). They make predictions for topics about which they have some knowledge. (So, someone who doesn’t own a dog mostly likely wouldn’t predict the success of a new dog food idea.)
Respondents, who can be thought of as traders or players, are given a bank of virtual currency to invest in answers to questions. They could be questions like, “Will this product appeal to new dog owners?” “Will Product X outsell Product Y?” or “Which of these statements will be most influential among new moms shopping for baby strollers?”
As respondents choose ideas they think are more likely to be successful, they allocate virtual currency or tokens based on the ideas they think are the strongest. (And, yes, they can invest in the likely failure of an idea as well as the success of one.) They invest as little or as much currency as they want based on their confidence in their own predictions.
Prediction markets are a fun, engaging way for consumers to sort through ideas, pick the strongest (relative to others); and then weigh in on the strength of individual ideas using virtual currency allocations. They can even see how the rest of the “market” is investing, and, again, consider reallocations. It’s like real-time investing, with open-ended questions capturing qualitative insights into why respondents allocated currency for specific ideas, but ... of course, without the risk of losing their shirts or their savings.
And, it’s fun.
Most marketers already know that respondent engagement is a concern. Because surveys are often uninteresting and long, respondents have the tendency to rush through surveys just to collect their incentive. In contrast, prediction markets provide an engaging experience, much like a game, with both intrinsic and extrinsic rewards. Gamification elements such as leaderboards offer respondents recognition and status as well as an opportunity to compete. (Who doesn’t like a healthy competition?) And, because respondents stand to earn an additional incentive for accurate predictions, they’re more invested in the outcome and are motivated to play, remaining engaged throughout the process with more thought and attention to the task at hand.
Prediction markets can return research results within days, not weeks or months, generally cost less than other quantitative methods, and provide richer results using an analysis that prioritizes concepts, ideas, advertising campaigns and more.
If you want to increase your odds of success for your next marketing or new product decision, place your bets on the crowd.
Feel free to contact Jennifer if you’d like to learn more about prediction markets