PSD Blog - The World Bank Group

Mainstreaming prediction markets at development institutions

I just recently finished reading James Surowiecki's The Wisdom of Crowds, and I've been thinking a lot about how prediction markets could be mainstreamed into the work of development institutions. Sure, the Iowa Electronic Markets are great at predicting the outcome of elections, and Hewlett Packard can get a much better forecast of future sales, but how can the World Bank or USAID use these tools to make themselves more effective?

At least one part of the World Bank Group is already experimenting with this technology. CGAP, an independent research center housed in the Bank and focused on microfinance, is trying to use prediction markets to assess the future of mobile banking. My colleague Jim Rosenberg over at CGAP explains:

CGAP and DFID are trying to figure out what mobile banking might look like in the year 2020. [We are] consulting industry with a prediction market around key driving questions on “How can government and private sector most affect the uptake and usage of branchless banking among the unserved majority by 2020?”

The market is open to anyone - through Aug 10. Get a login by writing to technology@cgap.org.

A boom year for prediction markets?

Could 2009 be a boom year for prediction markets? Two developments suggest this might be the case. First, many economists are predicting very low inflation (or, according to Nouriel Roubini, aka Dr. Doom, we may even see deflation.) When you trade in a prediction market, your money might sit for six months or a year without earning any returns while inflation slowly eats away at its value. Very low inflation (or even deflation) makes prediction markets a bit more attractive.

Second, with predictions of sluggish global growth in 2009, it's anyone's guess when stock markets will resume steady growth. Risk averse investors may find that prediction markets look - relatively speaking - a bit more attractive. While firms trading on the New York Stock Exchange may post profits or losses in any given quarter, prediction markets always pay out what they took in (minus a small commission). That predictability may be just what some investors are looking for.

Update: There's a third reason that 2009 may also be a good year for prediction markets. With governments taking a larger role in the economy - and particularly the financial sector - all over the globe, the decisions governments make become ever more important to private firms. Prediction markets offer the opportunity to hedge at least a bit against political decisions that may not be advantageous to particular firms.

Any other predictions about prediction markets?