Oracles: A book review by Bob Morris

Posted on: June 20th, 2012 by bobmorris

Oracles: How Prediction Markets Turn Employees into Visionaries
Donald N. Thompson
Harvard Business Review Press (2012)

Why and how “prediction market democracy” tends to make better decisions that, eventually, produce better results

Donald Thompson is an advocate of “prediction market democracy” because a prediction market can “revolutionize the way companies operate.” As I began to read his book, I was reminded of material in Judgment Calls, co-authored by Tom Davenport and Brooke Manville, in which they offer “an antidote for the Great Man theory of decision making and organizational performance”: organizational judgment. That is, “the collective capacity to make good calls and wise moves when the need for them exceeds the scope of any single leader’s direct control.”

I was surprised to learn that the prediction market business” has a long history, dating back to ancient Greece and an oracle, Gaia, an earth goddess in residence at Delphi on the slopes of Mount Parnassus. According to Thompson “business organizations are bad at aggregating their employees’ thinking on critical issues.” Also, Gaia is no longer available. In the absence of divine revelation or assistance in lesser form, organizations are relying more heavily on what can be learned from successful prediction markets, those that meet four requirements: diversity of experience and talents among the human sources; an independent decision-making process that protects participants from external pressures (e.g. “bullying”); an effective way to aggregate information from various sources; and incentive(s) sufficient to get participants to “take the exercise seriously.”

This book’s subtitle refers to employees who can become “visionaries.” I am intrigued by the possibility of adding ophthalmology to a supervisor’s core competencies, enabling her or him to improve direct reports’ vision so that they can “see” better in two quite different ways: recognize what is often ignored because others deem it “unimportant,” and, understand what is often dismissed because others deem it “insignificant.”

Throughout his lively and eloquent narrative, Thompson provides a wealth of information, insights, and counsel with regard to dozens of major business situations and issues such as these:

o  Why and how predications based on collective judgment are more reliable in sports, film, election, and estimation markets
0  How “bottom-up” prediction markets have been of substantial benefit to Google, Best Buy, and Rite-Aid
o  Lessons to be learned about prediction markets from Fortune Elkins, the “Technology Evangelist”
o  Jim Collins, How the Mighty Fall, and board-initiated markets
o  Predictive markets and anti-terrorism initiatives after 9/11
o  How prediction markets can help to determine relative value of government policies
o  When and how to use prediction markets to make long-term predictions
o  The desirability of running markets in a high-risk organizational setting
o  What to do (and not do) when an organization’s leaders “really don’t want to know”
o  The importance of “exercising exercising skepticism when faced with the results of an opaque prediction market”
o  How to avoid “unnecessarily bad decisions”

No brief commentary such as this could possibly do full justuce to the scope and depth of material that Donald Thompson provides in this book. While I re-read it, two key points became even clearer to me. First, it is imperative to create and then sustain an orgaiational culture within collective curiosity as well as mutual trust and respect drive effectuve communication, coopeperation, and collaboration. Also, prediction market methodology is more reliable than any other options I am aware of but it is by o means infallible. Paradoxically, its success is interdependent with its failure. Prediction market results, indeed all predictions, Thompson notes, “have to be wrong sometimes in order to be accurate. Unless a prediction market says ‘100 percent’ there is never certainty of the event happening. At 100 percent, there is no point in running the market.”

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