On March 17, technology research firm IDC and information technology publication The Industry Standard, announced a partnership centered on the latters prediction market. Specifically, the two companies will create a joint service, sold by IDC, matching the data generated by the prediction market with the insights of IDCs analysts. This new service appears to be one of the first applications of a prediction market to technology trend and market forecasting by a research firm. Could a prediction market forecast information technology markets more accurately than a technology research analyst? How might the principles of disruptive innovation apply here? Is this an attempt by IDC to disrupt itself?
The Industry Standard, famous for a quick rise to prominence during the dot-com boom and then a similarly quick decline into bankruptcy at the end of the boom, re-launched in early February in a web-only form built around the core of a prediction market. Prediction markets are much like the stock market participants can buy and sell shares or place bets on whatever the market has securitized (in the case of prediction markets, most often future events and outcomes).
Theoretically, as participants use their tacit knowledge and experience to bet for or against a specific outcome, the probability of that outcome actually coming true will rise and fall. By introducing a far greater number of inputs (scale) and a greater diversity of those inputs (scope) into the prediction process, these types of markets have shown to be more accurate, over the course of repeated trials, in forecasting outcomes than individuals or even groups of experts.
Following in the footsteps of technology prediction markets including Yahoo Tech Buzz and The PopSci Predictions Exchange, The Industry Standards market allows participants to place virtual currency bets on future technology-related events. Current predictions in the market include "Googles stock price will be below $500 per share by end of Q1, "Google to buy Digg, "Dell gets acquired by a Chinese manufacturer looking to get a foothold in the US, and "MySpace takes on iTunes with music store.
Unlike regular voting, participants can bet as much virtual money as they want on their predictions. When an outcome is achieved, participants who bet on that outcome when odds were low, for example, receive a greater payback than those who bet on that outcome when the odds were high. Participants who bet on an alternative outcome, lose the virtual money they placed on that bet. The names of the most successful participants, and their Net Worth are posted on the sites leaderboard.
Technology research firms such as IDC, Gartner, and Yankee Group are known for producing forecasts of revenue generation or unit sales. These forecasts are developed through the aggregation of inputs information from vendors and channels, macroeconomic conditions, customer surveys, technological trajectories, and so forth. Ultimately, however, there is only so much information that analysts can gather together and that, combined with intuition, experience, and a little secret sauce is used to generate the forecasts.
There are many ways in which prediction markets can fail to deliver accurate results. Assuming that a prediction market was constructed carefully and that it has the necessary quantity and diversity of participants, however, might it be able to aggregate a wider range of information than a technology research analyst could gather? Could a prediction market prove to be more accurate than a group of analysts? Could technology research firms turn the process of forecasting technology trends over to prediction markets and focus solely on analysis and interpretation?
Further, the principles of disruptive innovation teach that incumbents, if able, should co-opt or replicate the entrants innovation or business model to stave off disruption. Prediction markets are a potentially powerful low-cost, yet high quality tool for forecasting. Could an organization use a prediction market to harness collective intelligence to disrupt technology research firms? Might this new service offering be an attempt by IDC to protect itself from such an entrant?