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12 July 2007

Predictive markets in futures studies

The concept of using markets as a predictive intelligence tool for future studies has been too often critiqued by those who do not understand the nature of conclusions which can be drawn from market data. While we may question the collective groupthink that sometimes dominates on particular issues, and often find ourselves quite contrarian to the whole, the concept is an interesting one and deserves far more attention and exploration than it has been given. The politicization of the concept in the wake of media attention a few years ago has not helped in the least.

We have seen a few new efforts in the space - not least of which in Google’s internal predictive market - and there is even a journal for the field, but we fear that too much of the potential value has been destroyed by the politics of the thing, at least for this generation.

We also find the introduction of the economic element the most critical aspect of the successful predictive market. We have long been deeply suspicious of the arbitrary introduction of quantitative values into inherently non-numeric intelligence problems, and regrettably have seen far too much of a trend in recent years (especially in certain segments of the academy) that seeks to assign a false precision to ideas which exist entirely within subtle variations of the gray, better communicated through language and narrative than dry figures attempting to establish an aura of pseudo scientific rigor. The economic element is indeed another arbitrary figure – but there is something that focuses the mind when the scales are well perceived in terms of other weights such as opportunity costs or even the simple fixed pool of limited resources.

Thus it is with interest we note that the Long Now Foundation’s efforts to create a predictive market of its own, Long Bets. The Long Now effort has produced some very interesting forecasting and think pieces looking at the truly out years perspectives on the human condition, and its efforts here look quite promising. The market itself is largely a pairwise establishment, between those offering predictions regarding future scenarios, events, and drivers and those who would challenge the statement against a fixed sum to be donated to charity by the inaccurate party. As such, it is far less a mechanism for determining the wisdom of the crowd than it is a matter of watching the alpha geeks. For currently, the participants that are backing and challenging these predictions, are a smaller elite of highly connected, typically highly interesting individuals with strong existing public records in analysis and forecasting of difficult issues in complex and dynamic problem spaces. But this is very much a thing interesting in its own right.

In a way, this reminds us of the process in use at Stratfor, as recounted by their “Chief Intelligence Officer” George Friedman, in which their analysts are forced to make predictions for an internal record (apart from published FINTEL) regarding their assigned accounts on a quarterly and annual basis. These predictions are permanently tracked and make up a part of the analyst’s performance review and professional development process. (We would be very interested to see a study of their results over time correlated with other measures of analyst performance, if only from the perspective of a kind of reputation mechanism.)

The Long Bets effort bears watching. And more importantly, this is a low overhead mechanism that can easily be duplicated within the intelligence community, perhaps even as simply as establishing a short Intellipedia page to track IC internal versions (although the key financial elements are another matter entirely…. Perhaps the “bets” can be paid in non-currency commodities of unique value only within the vault…)

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