It was Dr. Samuel Johnson who famously declared that when two Englishmen meet, their first talk is of the weather. “They are in haste to tell each other”, he wrote, “what each must already know, that it is hot or cold, bright or cloudy, windy or calm.”
In recent times, however, the weather is an issue which has exercised the thoughts and minds of rather more than the English, and the talk is not always of what is already clearly known. I am referring, of course, to discussion and argument concerning the extent and potential causes of climate change. The global attention this now attracts is only heightened by the fact that the Kyoto Protocol designed to address this issue runs out in 2012, and because the Copenhagen Climate Conference ended without clear agreement. And with claims and counter-claims everywhere to be heard, it is not always easy to penetrate to the heart of what’s going on and what can be done about it.
A rather less burning climatic issue, but one which nevertheless continues to exercise the attention of the public every December is, of course, the question of whether our dream of a White Christmas will this year come true.
The stunning success of ‘prediction markets’ in recent years in forecasting everything from the outcome of national and international elections, the Oscars and the World Cup, to influenza outbreaks, the success of new pharmaceutical drugs and the sale of new printers, has placed these on the agenda of a wide range of agencies, ranging from the US Department of Defence to Google and Hewlett Packard.
So what are ‘prediction markets’ and why do they work?
Essentially they are a means of aggregating the wisdom of the crowd to produce the best estimate of what’s happening and/or what is going to happen. This can be applied in principle to anything ranging from how many jelly beans there are in a jar to how much the temperature of the planet will change over the next ten years. And, yes – whether there’ll be a White Christmas this year.
There are different ways of pooling the wisdom of the crowd, but all rely on a diverse group of individuals making their own judgements about the likely answer to a defined question. This can, and has, ranged from asking visitors to a country fete to estimate the weight of an ox, to asking a group of specialists to estimate where a missing submarine might be found. The astonishing thing is that there is a mountain of evidence dating back over one hundred years to demonstrate that the pooled wisdom of the crowd is usually much more accurate than the judgement of any individual member, however expert he or she may be.
The other way of pooling the wisdom of the crowd is to ask the members of the crowd to bet on what is likely to happen in the future. Markets of this type have come to be known as ‘prediction markets’ and are traceable back to at least 1868. Time and again they have out-performed expert opinion and other forecasting systems.
So the possibilities offered by prediction markets are important and exciting. Not least, of course, is the perennial question of whether we can look forward to a White as well as a Merry Christmas!
Yes indeed. We really could use the magic of the prediction markets to give us an informed clue about the likelihood of a White Christmas. But why spoil the fun? Why not wait till Christmas Day and just poke your nose out of the window? Now that’s real magic. It’s the magic of Christmas!
Professor Leighton Vaughan Williams
Director of Nottingham Business School’s Betting Research Unit
To speak to Professor Leighton Vaughan Williams, call the University Press Office directly on 0115 848 8751 or email email@example.com.