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Since 1991, Maddock Douglas has been providing its clients with the fresh thinking, innovation and diverse expertise to envision the future and build toward it.
What Are Prediction Markets, Anyway?
Maddock Douglas has been designing research tailored to the innovation world for almost 15 years. But we’ve found that when it comes to directly predicting what might happen in the future, the effectiveness of traditional research methods is limited. This is because people can’t reliably predict how they will behave next year (or even next week, sometimes). Leaders looking for quantifiable data about the future often come up short.
To address this problem, we’ve developed a unique, patent-pending methodology — ForesightRx — which leverages prediction markets (along with other techniques) to arrive at validated predictions of future trend impacts, needs and solutions that can be used as the basis for business strategy decisions and investment.
Prediction markets are a relatively new research tool, and they’ve become one of the most effective at our disposal when it comes to predicting the future accurately. But it’s important to understand how this methodology differs from the traditional quantitative market research that many of us are used to.
Intro to prediction markets
Let’s start with the definition of a prediction market. Simply put, a prediction market is any platform that allows people to make predictions they feel confident about. Essentially, it’s a place where people can opt-in to place bets on the future.
While prediction markets have already existed in the world for many years — take the stock market or a gambling books, for example — they are now being simulated in market research settings. They are different from traditional market research in a few ways.
1. Focus on participants’ expertise, not their identity
Traditional surveys tend to focus on a specific target consumer audience and ask them how they personally think, feel or expect to behave. Instead, prediction markets ask respondents to give their opinion on whether something is likely to occur in the future, regardless of whether they will personally take part in it or not.
For example, in the months leading up to an election, traditional polls would ask many voters to answer who they personally plan to vote for. Prediction markets would instead ask many respondents (likely voters or not) to predict who they think will win the election.
How do we know if a given person is qualified to make the prediction? Think of it like this: we don't want to let our bias preclude us from obtaining valuable input. Rather than pre-judging which types of people will have a helpful perspective, we are giving those individuals who have information an opportunity to share it with us.
2. Participants only answer the questions they feel confident about
With traditional surveys, respondents are generally required to answer all questions being asked. But in a prediction market, participants decide whether or not they wish to answer each question. If they are confident enough to respond to a question, they make their prediction. If they aren't confident, they won't want to risk their incentive and will choose not to respond.
A participant may answer questions in any order they choose, and they can actually see an aggregate of how previous survey respondents have answered — just like investors in the real world can see prices of individual stocks before they decide to buy or sell.
3. Each participant has “skin in the game”
The people making predictions need to have a stake in the outcome to motivate their decision-making. In traditional surveys, everyone who completes the survey generally receives the same incentive. With a prediction market, respondents whose personal predictions most closely match the final predictions of the market are compensated with a larger reward.
Each participant places a bet (which, in this case, is a portion of their survey incentive) and then gives an open-ended response to explain their rationale. An interesting thing happens when people have “skin in the game” — they take into account a much wider set of information beyond their own personal beliefs and emotions. In effect, we provide individuals who have more valuable information a much higher incentive to reveal it, while disincentivizing random guessing.
How exactly does a prediction market platform work?
A preview of a prediction market interface.
It’s a user-friendly, gamified platform that makes it easy for participants to review predictions and decide which ones (if any) they wish to place bets on.
Participants are given 100 tokens that they can use (or not) to place bets. This ensures that participants only place bets on the predictions they feel most confident about. An algorithm helps to calculate the final probabilities, with consideration to the frequency of responses and by measuring each individual participant's level of confidence and influence.
How do we interpret prediction market data?
As researchers, we don't just take the average of all respondents' answers and calculate a prediction. As we mentioned above, there are a few factors that get incorporated into the calculation, and we weight each respondent's answers accordingly. In addition to the percentage of respondents who think a prediction is likely to occur, we consider each participant’s confidence level, measured by the size of their bet. We also consider whether a respondent was an early research participant — who is more influential in determining the algorithmic probability — or a later one, who might be more subject to “groupthink.”
The participants’ verbatim explanations that go along with every response can also be illuminating, because they provide context and clues about why different people disagree on the likelihood of a given prediction.
How can leaders use what they’ve learned in a ForesightRx project?
Many of our clients use the output of a ForesightRx project to gain a competitive advantage on how to prepare for their industry's future. We have also had clients who use what they’ve learned to fuel their thought leadership platforms and reinforce their reputations as a forward-thinking industry leader. For industries that depend on intermediaries, like real estate agents or financial advisors, the learnings from ForesightRx can be used to strengthen the bond with these important partners.
Sometimes our clients may already have a good idea of what future events or needs might come to fruition, but they’re having trouble getting the organization to move forward and make critical investments. ForesightRx findings can provide supporting data that helps leaders get buy-in and secure budgets for critical initiatives.
Whether we’re looking for confirmation or looking for what’s next, ForesightRx (and prediction markets) help to bring actionable data to future decision-making.
To learn more about ForesightRx, you can also watch a quick video or download the info sheet.