The Expert Magnet

The Woodrow Wilson Center’s Science and Technology Innovation Program (STIP) recently announced that they’re creating a prediction market to forecast future events of interest to the scientists, such as who will make the first breakthrough with real “artificially intelligent” machines or which Millennium Prize math problem will be solved next.  Nerdy stuff.

As is common for prediction markets, it will encourage participation from a wide range of individuals that don’t usually work together, from biologists to engineers to computer scientists.   In fact, anyone with an email address can register to participate in the market. That’s right, no specific experience required.

The openness of prediction markets is often perceived as heretical by market researchers.  We wouldn’t dare launch a survey targeted at folks with no expertise in our area of interest, especially if we’re trying to answer questions as niche as STIP’s (e.g., “Can scientists create a synthetic organism that will allow us to produce hydrogen fuel?”)  So how can prediction markets get away with it?

The answer to that question lies in a fundamental difference between surveys and prediction markets:  incentives

In a survey, everyone invited has an equal incentive to participate.  Usually this incentive comes in the form of a cash reward or entry into a prize drawing.  Sometimes it’s simply the intrinsic reward of knowing that your voice was heard.  In any event, the reward is the same for every survey respondent regardless of their level of expertise or the quality of their feedback.

In a prediction market, the incentive structure isn’t quite so socialistic. Those traders with the best information or opinions tend to perform best in the market, and thus enjoy a greater reward in terms of dollars won (either real dollars or virtual ones.)  Those traders who perform poorly don’t get any incentive at all, and in the case of real-money markets they actually stand to lose something for participating.

So even though anyone can participate in STIP’s prediction market, not just anyone will participate.   Those individuals with the best information or strongest opinions about a given topic are most likely to bet on that topic.  As an added bonus, even amongst these self-selected experts, not everyone will have the same voice in the market.  Since traders can vary their bets depending on how strongly they feel about a particular outcome, those with the most confidence will bet the most and thus have the greatest impact on the market results.

What appears at first to be lazy and haphazard approach to determining who gets to participate in a prediction market is actually quite sophisticated.  Due to the very nature of markets, only the most expert-amongst-experts will ultimately participate in a given market and bet enough to affect the market’s results.

You could say that a prediction market is an excellent magnet for expertise.

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