Saturday, August 23, 2008

Predictive markets = skin in the game

This isn't a political blog. But this past week's deliberations about the VP picks offer us an opportunity to think about how markets and events can be predicted.

(Note that this post is being written before the Democratic vice presidential choice has been officially announced.)

This past Tuesday, August 18, I received an email (as some of you may have also) from Cygnus Associates, a company that designs and deploys "predictive markets for business." The subject line read: Predictive Markets Signaling Biden as Obama VP Pick.

This subject line referred to predictions made by markets like the real-money market at InTrade and the paper money one at InklingMarkets. On Tuesday last, Biden was selling at Intrade just below $50 with volume up sharply on both markets, meaning real bucks were saying there was a 50% chance Biden would be Obama's VP pick.

At the time of this post, it's four days later and just after midnight on Saturday morning, August 23, an hour or so after ABC news reported a Secret Service detail has been sent to cover Senator Biden. His price on Intrade has now risen to almost $99 and to $94 on Inklingmarkets.

In other words, Senator Biden is as close to a sure thing as it's possible to be before the event happens. And there were strong early warnings earlier this week that he was a sure thing.

So how might predictive markets be useful for law firms that want to make better decisions? First, consider that both voting and investing money (whether real or paper) are two ways in which people communicate what they want for their future. Second, voting and investing (betting and re-betting) require individuals to gather, synthesize and distill all the information they have into intelligence. Predictive markets pool that intelligence and perfect the crowd's wisdom.

No one knows for sure what's over the horizon or what the next new thing is. But when we put some of our own skin into a game, we're more likely to participate in important ways that shape the game's outcomes. And that's certainly something every law firm's leaders would like to see all partners do -- participate more.

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