Prediction markets are a current fascination, proposing as they do to aggregate the wisdom of the crowd so that we can set odds on the likelihood of specific events. They promise to achieve the thing humanity has always wished for: to know the future.
Prediction has its place. Sometimes it’s even accurate. But prediction is not strategy. And it is certainly not scenario planning.
How did we get here?
The concept of prediction markets has been around since 1988, when the Iowa Electronic Market launched with the aim of seeing how well a market could predict the outcome of that year’s presidential race in the United States. The goal of the experiment was to see if an exchange might do a better job of forecasting than pollsters or experts.
With just 200 participants IEM forecast the Bush-Dukakis almost to the decimal point. Ahead of the last presidential election in the US interest in the idea went mainstream—in part because the invention of cryptocurrency allowed market participants (let’s call them “bettors”) to easily participate around the world.
In recent years the concept evolved inside some organizations as “decision markets.” In a decision market participants make their bids and leadership gets the real-time perspective of stakeholders. These “exchanges” are customized to specific operational environments.
Eli Lilly was a pioneer in using internal decision markets to get a handle on expectations for the success of drug trials. Google and Microsoft use them to set product launch dates. Best Buy applies them to assessments of store performance.
And beyond corporate applications, prediction markets like Polymarket and Kalshi allow people to place bets on anything from sports, to movie ratings, to war events in Iran (e.g., When will the Strait of Hormuz reopen?).
Prediction market risks in corporate strategy
Decision markets have the advantage of using current data to predict the near term. As AI-powered forecasting tools become more powerful we can expect decision markets to become more commonplace inside organizations. (Which we acknowledge is a prediction.) This will come with risk.
First among these risks may be the illusion that decision markets are the same as strategy or will somehow replace the analytical and judgmental elements of strategic planning.
Second is what we might call “the law of small numbers.” In any sampling of opinion a small number of participants can warp a truthful perspective on the facts. It is hard to tap the wisdom of the crowd, after all, if there is no crowd.
Small markets are always at risk of manipulation. This is always a concern in organizational decision making. It might be made more opaque by the assumed legitimacy of “an open market.”
The healthy discomfort of scenario planning
The difference between decision markets and strategy is most apparent in scenario planning, at least as FSG scenario consultants practice it.
Our methodology—to which alternative scenarios are fundamental—forces organizations beyond comfortable collective opinion or extrapolative views of how the future might turn out. Our approach challenges organizations to test multiple paths along which the future could plausibly turn out. It does not yield best-guess, single-point forecasts.
The product is the creation of a core set of “robust” strategic options tested across a diverse set of scenario environments. These are durable enough to take an organization through inevitable volatility and disruption of real life.
In common with internal prediction markets, our approach depends on access to the collective wisdom of the organization—which, if we are candid, can at times be uncomfortable for senior leaderships leery of such democracy. Decision markets, at least, may offer the comfort of ratifying conventional wisdom.
Here is what great strategic thinkers know: Making ourselves uncomfortable is necessary to seeing beyond what we may not even realize is present mindedness. To get past, in other words, our hidden attachments to what we think we all know.
Highly accurate forecasts are over rated. In doing scenarios we provide very detailed pictures of specific futures and invariably business leaders disagree on exactly what they should do in that world. Even specific price forecasts for a specific date can be treacherous with out knowing the path from today’s price to that future price. For that matter asking someone: Knowing what you know today what would they have done differently in the past; often gets a lot of hemming and hawing.
What Scenario Planning attempts to do is improve ones decision making in the face of uncertainty. To enable one to make intelligent decisions as the future unfolds. Forecasts as compared to scenarios are irrelevant when you understand that you are dealing with the unknowable.
Indeed, Robert.
As we like to say, there is no data about the future. Pretending to preciscion creates a comfortable feeling of knowing what comes next.
There are endless examples of how wrong organizations can go when they bank on what their forecasts tell them will be so.
A large oart of the reason is that, often without realizing it, embedded in their forecasts is an affirmation of what they already believe about their operating environment. A good example is AT&T, which just before the breakup of the old telephone monopoly was convinced that their status as “the phone company” would go on and on. It was all they knew, so of course it had to contnue.
Insightful essay. I’m struck by the point that forcing organizations to get “beyond comfortable collective opinion” is a good, useful thing. I can see how prediction market approaches can reinforce the comfort zone tendency. Scenario planning, in contrast, can make leadership nervous. Where scenario thinking leads is unpredictable and may in fact challenge established “truths” about corporate strategy and direction. That is always a good thing.
Nicely done, Kevin. I would add just two things. First, you noted that small markets can be manipulated. I would add that large public markets are equally vulnerable if national public figures (with media access) can make pronouncements that temporarily distort perceptions about some event. Second, I have been to organizations that employed the “wisdom of crowds” approach to strategic planning. In both cases, they learned that the company needed to offer higher wages, better benefits, and more vacation time. They learned that things were better ten years ago. In one case, they discovered that no competitors were a threat. In the other case, they discovered that all competitors were an enormous threat. The strategies developed from the wisdom of crowds work were the most pristine example of lowest common denominator I have ever seen.
I will admit that the interviews and research they did to prepare for a wisdom of crowds planning approach made excellent contributions to the scenario planning we did for each organization one year later.
You’re making me think, Tom, that just as Robert observes the comfort of a false precision in forecasting decision markets can give senior leaders the deceptive reassurance of what feels like democracy inside the organization.
I say deceptive because when you ask people to bet on the potential of certain outcomes you have explicitly limited the range of possibilities–probably without realizing that you have done that.
The gift of scenario planning–and as Pete Kennedy remarks the thing that can make leadership uncomfortable–is that it discovers possibilities that had not been previously imagined.