The Hindu Business Line : Predictive markets

If you are an employee, it is likely that your views are not always accepted by your employer. Worst still, if your organisation is like the one that my friend works for, a consultant will be paid fancy fees to deliver the same suggestion that you gave your boss five years ago! Not all companies treat their employees that way. Some set up internal stock market and encourage employees to ‘trade’ their views on the company’s future. Others may simply bet on how a severe monsoon will affect their company’s ice-cream sales. Such tradable views are part of what is called as Predictive Markets. What is it?

Long on Brazil, short on Germany

These are markets where participants trade their views for real or play money. The objective is to predict the future of the underlying. You can have a predictive market for, say, the World Cup football. You may bet on Brazil winning the cup while your friend may believe that Germany will be the champion. In market parlance, you are long on Brazil and short on Germany.

How does trading views help? Hewlett-Packard set up a predictive market to trade on monthly sales forecast. The result? The internal stock market predicted the actual sales better than the company’s official forecast more than 75 per cent of the time!

Defence Advanced Research Projects Agency (DARPA), an arm of the Pentagon, wanted to capture terrorist information by allowing people to ‘trade’ their views on terrorist attacks. The project was, however, abandoned due to senate protest.

Hollywood Exchange lets you trade your views on movie revenue. Analysts at major US investment banks use this information to forecast revenue and value a company that produces the movie.

You may trade your views on whether a project will finish on time or if your company will win a tender in South America. Or you may want to bet on the number of days the recent Harry Potter movie will top the chart. Whatever the underlying, gear yourself for a tradable future.

(The author is a Chennai-based financial analyst.)

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