Chapter 1 - The Hows and Whys of Information Markets

https://doi.org/10.1016/B978-0-12-385512-1.00001-3Get rights and content

Abstract

The use of information markets as a business intelligence (BI) technique for collecting dispersed intelligence and forming knowledge to support decision making is growing rapidly in many application fields. The objective of this chapter is to present a focused survey of how information markets work and why they produce accurate and actionable knowledge upon which effective decisions can be based. Numerous exemplars from the literature are described and key future research directions in information markets are highlighted.

Section snippets

Business Intelligence and Information Markets

The key to any business intelligence (BI) tool is the ability to aggregate information from many disparate sources, summarize it into meaningful measures, and display it appropriately in forms usable by decision makers. The capabilities of BI tools have changed dramatically since the term was first coined by Luhn [1], but the main objective of BI tools is, and will always be, to inform decisions. BI tools can uncover trends or patterns that were previously unknown and improve the quality of

Information Markets Theory Base

To begin, it is important to appreciate the broad base of theory from economics and other sociotechnical disciplines that ground current research and application of information markets.

How Information Markets Work

Information markets, often known variously as prediction markets, decision markets, event markets, and idea futures, are an emerging form of futures markets created to aggregate information, rather than to hedge risks.

Information Markets Applications

While research on information markets has witnessed an exponential growth in the number of published articles in the past 10 years [31], prediction markets have been around for a long time. Betting on political outcomes has a long tradition in the United States, with large and formal markets, such as the New York betting market, operating for over three-quarters of a century [32]. These markets have had a very large volume of activity and a notable predictive accuracy [32].

Today, the IEM, the

Information Aggregation Methods in Information Markets

Organizations employ various methods to elicit forecasts and aggregate information held by members of a group. When the issues at hand are purely factual, statistical groups can be generated by asking a large group of individuals and calculating the statistical mean or median of their answers [44]. However, when the group is anchored by a misleading value for the statistic in question or the group members are ignorant of the issue at hand, the likelihood that the group will decide correctly

The Advantages of Information Markets

Much of the enthusiasm for using information markets as a method of forecasting and information aggregation comes from the inadequacy of existing methods to accomplish this task. Information markets are being used to overcome the limitations of the various aforementioned methods. Green et al. [49] discussed how information markets can avoid the drawbacks of Delphi. First of all, markets are not restricted by experts’ availability; instead, traders self-select to participate in the market if

Research Directions for Information Markets

The many advantages of information markets and their impressive performance in many current applications support great potentials for wide use across many business and technical fields. Studies that test the usefulness of information markets in various application domains and processes are greatly needed. Our extensive literature survey found that research on how information markets are used inside organizations is still in its infancy. Little is known about the impact of the business

References (64)

  • J. Muth

    Rational expectations and the theory of price movements

    Econometrica

    (1961)
  • A.C. Hess

    Experimental evidence on price formation in competitive markets

    J. Polit. Econ.

    (1972)
  • E. Fama

    Random walks in stock market prices

    Financial Analysts J.

    (1965)
  • B.G. Malkiel

    A Random Walk Down Wall Street

    (1996)
  • E. Fama

    The behavior of stock market prices

    J. Bus.

    (1965)
  • E. Fama

    Efficient capital markets: a review of theory and empirical work

    J. Finance

    (1970)
  • J. Clark

    Emotional errors

    J. Personal Finance

    (2007)
  • J. Fox

    Is the market rational? No, say the experts. But neither are you—so don't go thinking you can outsmart it

    Fortune

    (2002)
  • B. Rosenberg et al.

    Persuasive evidence of market inefficiency

    J. Portf. Manag.

    (1985)
  • R. Forsythe et al.

    Anatomy of an experimental political stock market

    Am. Econ. Rev.

    (1992)
  • J. Wolfers et al.

    Prediction markets

    J. Econ. Perspect.

    (2004)
  • K. Oliven et al.

    Suckers are born but markets are made: individual rationality, arbitrage, and market efficiency on an electronic futures market

    Manage. Sci.

    (2004)
  • R.J. Aumann

    Agreeing to disagree

    Ann. Stat.

    (1976)
  • J. Wolfers et al.

    Five open questions about prediction markets

  • J.L. Jones et al.

    Information markets: a research landscape

    Commun. Assoc. Inf. Syst.

    (2009)
  • R. Hanson

    Idea futures: encouraging an honest consensus

    Extropy

    (1992)
  • M. Spann et al.

    Internet-based virtual stock markets for business forecasting

    Manage. Sci.

    (2003)
  • E. Servan-Schreiber et al.

    Prediction markets: does money matter?

    Electron. Markets

    (2004)
  • K.-Y. Chen et al.

    Forecasting uncertain events with small groups

  • D.M. Pennock

    A dynamic pari-mutuel market for hedging, wagering, and information aggregation

  • R. Hanson

    Combinatorial information market design

    Inf. Syst. Frontiers

    (2003)
  • R. Hanson

    Logarithmic market scoring rules for modular combinatorial information aggregation

    J. Prediction Markets

    (2007)
  • Cited by (0)

    View full text