The relevance of prediction markets for corporate forecasting

Abstract

Prediction markets (PMs) are virtual stock markets on which shares are traded taking advantage of the wisdom-of-crowds principle to access collective intelligence. It is claimed that the accumulation of information by groups leads to joint group decisions often better than individual participants’ approaches to solutions. A PM share represents a future event or a market condition (e.g. expected sales figures of a product for a specific month) and provides forecasts via its price which is interpreted as the probability of the event occurring. PMs can be used in competition with other forecasting tools; when applied for forecasting purposes within a company they are called corporate prediction markets (CPMs). Despite great praise in the (academic) literature for the use of PMs as an efficient instrument for bringing together scattered information and opinions, corporate usage and applications are limited. This research was directed towards an examination of this discrepancy by means of focusing on the barriers to adoption within enterprises. Literature and reality diverged and neglected the important aspect of corporate culture. Screening existing research and interviews with business executives and corporate planners revealed challenges of company hierarchy as an inhibitor to the acceptance of CPM outcomes. Findings from 55 interviews and a thematic analysis of the literature exposed that CPMs are useful but rarely used. Their lack of use arises from senior executives’ perception of the organisational hierarchy being taxed and fear of losing power as CPMs (can) include lower rungs of the corporate ladder in decision-making processes. If these challenges can be overcome the potential of CPMs can be released. It emerged – buttressed by ten additional interviews – that CPMs would be worthwhile for company forecasting, particularly supporting innovation management which would allow idea markets (as an embodiment of CPMs) to excel. A contribution of this research lies in its additions to the PM literature, explaining the lack of adoption of CPMs despite their apparent benefits and making a case for the incorporation of CPMs as a forecasting instrument to facilitate innovation management. Furthermore, a framework to understand decision-making in the adoption of strategic tools is provided. This framework permits tools to be accepted on a more rational base and curb the emotional and political influences which can act against the adoption of good and effective tools.