More forecasting with predictive markets?

Earlier this week, I posted about the possible use of predictive markets to develop competitive intelligence, citing InTrade’s and InklingMarkets’ early warnings that Senator Biden would be the Democratic VP nominee. These tools were brought to my attention by Tom Davis at Cygnus Associates

Late last night watching the Democratic Convention, I heard CNN report that the presumptive Republican nominee, Senator John McCain, has settled on his pick for a VP running mate. So I trotted over to Intrade to look at the action on Republican VP front-runners. During the preceding 24 hours, Governor Romney’s stock had fallen $20, from $65 to $45, but had started to crawl up again. His price was almost twice that of the next-highest contender, Tim Pawlenty, who was at $24.20.

This morning at 7:30 a.m. I see that Romney’s stock continued climbing overnight and is now up $13.50 at $58.50. In other words, the market predicts there’s a 58.5% chance he will become the nominee. Since midnight, Pawlenty is down by $2.20 to $22.00.

I’m not sure if this is CI or just political obsession, but stay tuned.

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.