Prediction Markets to Discover Disruptive Web2.0 Business Model Innovations

Have you ever heard of prediction markets? It's all about applying market mechanisms to predict the likelihood of certain events taking place (e.g. Arnold Schwarzenegger becoming US president). The market prices of an event is interpreted as a prediction of the probability of the event to happen. It could be quite interesting to apply prediction markets to forecast which one of all the mushrooming Web2.0 services and business models might succeed (by getting bought or by doing an IPO at a real stock market). Eventually the unsuccessful ones will run out of cash and disappear anyways, but prediction markets might speed things up.

Prediction markets have a long history starting with the University of Iowa's "Iowa Electronic Market". Since 1988, this market has predicted the results of American presidential elections more accurately than traditional polls 75 percent of the time. Today prediction markets are also finding their way into industry. An obvious field of application is pharmaceutical research. Pharma giants spend billions of dollars in research on hundreds of projects of which only very few succeed. It is a very important for them to allocate resources to promosing projects while killing off likely losers early. For example, Eli Lilly has used prediction markets to identify promising molecules. Other well known users of prediction markets are Google who have internally identified "google talk" through this mechanism or Siemens who has applied this mechanism to UMTS telephony.

The reason why I am currently interested in this topic is because my colleagues, Cedric Gaspoz and Professor Yves Pigneur, are aiming at applying prediction markets to scientific research. Ultimately they want to test if prediction markets could help better allocate research funds to potentially successful projects. They have already built a nice market platform, which they are now testing with a number of trials. One trial is a market to predict which city will host the Olympic Winter Games 2014. The market is open to everybody at Trading is quite fun and I can only recommend you join and try it out!

(picture: The Hollywood Stock Exchange which applies prediction markets to the film industry)