ABSTRACT
Interest in prediction markets has grown over the last decade. Using the search string “prediction markets,” I searched the Google News Archive (for the number of published news articles) and Google Insights for Search (for the frequency of Internet searches) to estimate public interest in the method. The number of news articles dealing with prediction markets has constantly grown since the beginning of the decade, reaching its peak with the US presidential election in 2008. While Internet users showed no considerable interest in prediction markets before 2006 (Google provides data on Internet searches since 2004), the frequency of searches increased sharply in 2007 and, as with news articles, peaked in 2008. However, in 2009, the number of news articles and Internet searches dropped to levels of before 2006 and 2007, respectively. The boost in the popularity of prediction markets at the beginning of the century can be traced back to two events. Ironically, the cancellation of the Policy Analysis Market (PAM) in 2003 initially introduced prediction markets to a broad public. In a review of the origin and development of the PAM project, Hanson (2007) reported that more than 600 media articles covered the story. One year later, James Surowiecki’s bestselling book, The Wisdom of Crowds, was published, which described prediction markets as a powerful method to harness collective intelligence. In the following year, prediction markets were listed on the Gartner Hype Cycle, and the media frequently reported of companies (such as Eli Lilly, General Electric, Google, France Telecom, Hewlett-Packard, IBM, Intel, Microsoft, Siemens and Yahoo) experimenting with prediction markets. Despite increasing interest, we do not know much about the relative accuracy of prediction markets and alternative forecasting methods. Published studies are limited and often of a small scale. In addition, prediction markets have often been compared to weak benchmarks. Here, I summarize published empirical evidence on the relative accuracy of prediction markets in the field of business forecasting.
