With the U.S. election right around the corner and the ongoing debate over whether Greece (or any other country) may leave the Euro, we thought we would talk a bit about prediction markets which track the so called "wisdom of the crowd" theory.
The "wisdom of the crowd" theory is the process of taking into account the collective opinion of a group of individuals rather than a single expert (pundit) to answer a question. A large group's aggregated answers to questions involving quantity estimation, general world knowledge, and simple reasoning has generally been found to be as good as, and often better than, the answer given by any one of the individuals within the group. The often-cited explanation for this phenomenon is that there is personal noise associated with each individual judgment, and taking the average over a large number of responses will go some way toward canceling the effect of this noise.
With the information age has come the ability to gather the "wisdom of the crowd" via prediction markets. The most well known of the prediction market websites is Intrade (www.intrade.com). Intrade is a site that allows users to make predictions on the outcome of hundreds of real-world events. Stock markets find the price of stocks at any given moment, and futures markets find the price of commodities at any given moment. Prediction markets, like Intrade, find the probability of something happening - a predefined, uncertain future event.
While not always 100% accurate, the site offers a way to watch the fluctuations of probability for various future events. Elections are one of the main events on the site and it is interesting to see the fluctuations from week to week.
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