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Can the crowd predict the economy?

09.04.2013
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James Surowiecki’s Wisdom of Crowds was published almost a decade ago now, and in that time his ideas on the power of crowds have helped spawn the crowdsourcing movement.  The idea that under the right conditions the crowd is more intelligent than the smartest of experts is a simple yet beguiling one.

Prediction markets are one manifestation of this theory, with organisations allowing people to bet on a particular issue, and the aggregation of those bets used to predict the outcome.  The CrowdMed site for instance use prediction markets to try and improve medical diagnosis.

Can the crowd successfully predict arguably the most complex system on the planet though?  That was what the Adam Smith Institute and Paddy Power have set out to discover.

They have launched a prediction market to try and use the wisdom of crowds on economic planning.  The market will ask participants to place bets on what they believe the rates of inflation and unemployment will be in June 2015.

“By combining the local knowledge of thousands of people, betting markets can outpredict any panel of experts. If these markets catch on, the government should consider outsourcing all of its forecasts to prediction markets instead of expert forecasters.” ASI’s Sam Bowman said.

Whether this works however remains to be seen.  One of the criteria set in Wisdom of Crowds was that participants weren’t aware of the other guesses, so groupthink would not ensue.  By partnering with a bookmaker, the odds available will no doubt sway peoples opinions.  For instance it is currently 7/2 that inflation will be higher than 5%.  The view of Paddy Power therefore is undoubtedly going to influence the punts people make.

In that sense it isn’t a pure prediction market, which would arguably have made a much better stab at things.

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