INTERNET pundits make a spectacle of their annual predictions for online holiday sales. Now an Internet group is turning to a new approach to arrive at its forecast: just ask everybody.
The Sloan Center for Internet Retailing, part of the University of California, Riverside, will announce a new Web site tomorrow relying on so-called prediction markets to foretell online sales and other Internet-related trends, like the shopping sites most likely to survive, or the popularity of “World of Warcraft.” In doing so, the Sloan Center is adopting a method of online research that off-line companies have used widely in recent months, but one that is not in broad use to study Internet sales.
“It’s increasingly hard to get people to participate in research studies, but they’re very eager to participate in prediction markets,” said Thomas P. Novak, a director of the Sloan Center. “Consumers are actually coming to you, which seems to me what the Web is all about.”
The concept behind the Sloan Center’s initiative, and the trend in general, is known as competitive forecasting, where Web sites pit users against each other to determine who is the most prescient about a certain topic. Analysts said this method, publicized widely in “The Wisdom of Crowds,” the book by the New Yorker columnist James Surowiecki, yields more accurate results because participants care much more about their answers than in a typical phone survey.
Results of the best-known examples of prediction markets seem to bear this out. Cantor Fitzgerald’s Hollywood Stock Exchange (www.hsx.com) last year predicted 32 of the 36 major-category Oscar nominees and over the last three years has correctly predicted 92 percent of the major-category Oscar winners. And the Iowa Electronic Markets (www.biz.uiowa.edu/iem) often predicts election results more accurately than pre-election polls.
Unlike those Web sites, which operate as futures markets, with participants backing their predictions with dollars or online scrip, the Sloan Center’s eLab is free and gives participants a way to earn something potentially more valuable: a reputation. Users assume an online identity, then answer a slate of questions. The site ranks users on the quality of their answers, and offers a gift certificate of $25 monthly to the top-ranked participant. Every three months, the top-ranked user wins a $500 gift certificate.
Prediction markets offer unreliable results if too few people care enough about a topic to answer questions carefully, but Mr. Novak believes $25 and the promise of e-commerce industry fame will attract at least “hundreds of people” — enough, he said, to establish statistically significant results. In addition, he said he and Donna Hoffman, another Sloan Center director, had designed the site so people could choose the most interesting questions to pose on the site.
The eLab Exchange hopes to follow the lead of grass roots successes like YouTube and MySpace in not spending money on traditional advertising. It will count on discussion boards and blogs devoted to niche Internet topics in hopes they will attract a respectable user base. Mr. Novak said that even though the results of questions posed on the Exchange would be valuable for e-commerce companies, the Sloan Center would not seek to market its data. “We’re academics,” he said. “We’re in this for the fun.”
The same cannot be said for the many other companies lining up to use prediction markets to glean — and then sell — business research. Robin Hanson, an economics professor at George Mason University and a consultant to companies building prediction markets, said: “A lot of new business plans are based on this idea. There’s a big trend in this area, with people thinking this is cool.”
But Mr. Hanson said he was skeptical about many of the dozens of businesses he had seen forming around the concept, because outside of topics like politics, movies or sports, few subjects would entice people to render carefully considered opinions. “It’s kind of like a job,” he said.
At the moment, the trend is mostly benefiting companies that sell software to create online predication markets, like Consensus Point in Nashville and NewsFutures in Baltimore. These companies say demand has jumped over the last year, both from organizations like the Sloan Center, who want to create public sites, and from corporations like Best Buy, Hewlett-Packard and others that are using private Web sites to devise business strategy with the help of their employees.
“You’re now seeing very serious businesses using this for important projects,” said Emile Servan-Schreiber, chief executive of NewsFutures. Eli Lilly, for instance, has used online prediction markets to predict drug sales, while Arcelor Mittal, the world’s biggest steel maker, has used this technique to forecast a wide range of business trends.
Mr. Servan-Schreiber said his company helped businesses build the Web sites, devise incentives for users and craft the questions properly, at a cost that was in the “tens of thousands of dollars per year.”
Zubin Dowlaty, vice president of emerging technologies for InterContinental Hotels Group, recently began using online prediction markets to ask employees which new technologies the company should invest in. In the future, he said, the questions will encompass the full range of the company’s services, and would perhaps be open to the hotel’s customers.
“Compared to polling people, this significantly improves the process of harvesting and prioritizing ideas,” Mr. Dowlaty said. “And the cost is extremely low, relative to surveys or engaging a consulting firm.”
While Mr. Dowlaty and other executives glean what they can from their internal prediction markets, they can always peek at the Sloan Center’s eLab eXchange for intelligence from the masses.
“If the market is thick enough there, it’d be a very valid research approach,” he said. “It could always spark ideas I could use on mine.”