Thursday, August 5, 2004

Green Foothills' Decision Markets

I (Brian) have been listening to the audio version of a good book recently, The Wisdom of Crowds. The author's thesis is that groups can arrive at the correct answer to a question more reliably than single individuals, even if the individual is an expert and the group members are not. Larger groups are better decisionmakers than smaller ones. The reason for this is that each individual knows some small amount of useful information along with random biases. In the collective decisionmaking, the random biases cancel each other out and the correct answer emerges, under the proper circumstances. The author then goes on to discuss ways that the process goes wrong.

An example of this type of decisionmaking is a decision market, where people bid real or fake money on how a future decision will turn out. The best known examples of this are the Iowa Electronic Markets (real money predictions of electoral results) and Hollywood Stock Exchange (fake money predictions of Hollywood success or failure). These markets have consistently out-performed expert predictions and polls.

The Wisdom of Crowds author says decision markets can work well even with small groups, and recommends them to corporations. CGF might also find it is interested in them as well, for determining what issues are either sure winners or sure losers regardless of our involvement (which suggests we should spend little time on them) and what issues hang in the balance where we might want to spend maximum effort.

Real money markets, even small money, would create obvious problems, but fake money markets are just a matter of software and bandwidth (and time spent managing them). They could be kept small and confidential so that only the environmental groups involved know what the markets suggest the future will be like. Making them public has advantages too - more participants will make them more accurate, and if our opponents understand that a highway from Central Valley to San Jose has not a snowball's chance in Fresno of happenning, they won't waste our time by pushing their proposal forward.

Maybe an idea for the not-too-distant future.


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