March 24, 2006
Is the crowd stupid — or brilliant?
Joseph Nocera writes a weekly column for the Saturday New York Times Business section.
His March 11 piece was about the rise of so–called prediction markets, "in which groups of people guess or bet on something, with the results aggregated into a consensus. Prediction markets, while not perfect, are surprisingly accurate — certainly more accurate than individual experts or polls, research has found."
Why should this be?
How can people who know nothing individually about a given topic somehow as a group become prescient?
Here's Nocera's column.
- The Future Divined By the Crowd
Last Sunday was Oscar night, which of course meant movie stars, glamour, Jon Stewart's jokes and -- drum roll, please! -- Michael J. Mauboussin's annual economics experiment.
Or rather, his annual economics eye-opener.
Mr. Mauboussin is a well-known Wall Street strategist, now with Legg Mason, who gained a following for an offbeat, scholarly newsletter called The Consilient Observer, in which he tackled such diverse subjects as what investors can learn from Tupperware parties and why stress can lower investment performance.
His work is sometimes dense, but always original.
Since 1993, Mr. Mauboussin has also been an adjunct professor at Columbia Business School.
Every year, as the Academy Awards approach, he asks his students to vote for the winners in 12 categories, not just the biggies but some relatively obscure ones, like best film editing and best art direction.
Then, after the Oscars have been awarded, he tallies the results and compares the students' predictions with the winners.
This year, the pick that got the most votes -- the consensus pick, he calls it -- turned out to be right in 9 of the 12 categories, including, amazingly enough, film editing and art direction.
And yet, of the 47 students who participated, only one matched the accuracy of the consensus.
None did better, and most did much worse; according to Mr. Mauboussin, the average number of correct answers per ballot this year was only 4.1.
''It has never failed,'' he said. ''The consensus invariably does much better than the average student.''
The point of Mr. Mauboussin's little experiment is to illustrate the power of so-called prediction markets, in which groups of people guess or bet on something, with the results aggregated into a consensus.
Prediction markets, while not perfect, are surprisingly accurate -- certainly more accurate than individual experts or polls, research has found.
The granddaddy of prediction markets, the Iowa Electronic Market, which the University of Iowa has run since the late 1980's, allows people to make election predictions.
The consensus almost always beats the polling data; in the last presidential election, for instance, it not only steadfastly predicted a Bush victory, but came within 1.1 percentage point of the actual result.
Prediction markets aren't just for curious academics anymore; in the last few years, there has been an explosion of interest.
A handful of dot-coms, with names like Hollywood Stock Exchange, hedgestreet.com and Newsfutures, offer people the chance to predict everything from how much a new movie will gross in its first month to whether gasoline prices will rise. (Hedgestreet.com's slogan is: ''It's your economy. Trade it.'')
Some sites plan to permit Wall Street traders to begin trading on such questions, much in the way commodities traders bet on the future price of soybeans.
Perhaps most intriguing, companies have begun experimenting with prediction markets as a new kind of forecasting tool.
Though it's still a little early to say for sure, prediction markets could wind up changing the ways companies go about making decisions.
There are two recent events that gave rise to this new interest.
The first was a quasi-disaster.
In 2003, John M. Poindexter, who was heading up a small research group inside the Pentagon, tried to create a public prediction market for geopolitical events, including possible terrorist attacks.
But the criticism was swift -- Mr. Poindexter was accused of creating ''terrorism futures'' -- and the program was killed.
Still, the publicity got a lot of businesspeople thinking about the utility of prediction markets. ''The Pentagon,'' chuckled Alexander Costakis, who runs the Hollywood Stock Exchange, ''put it on the map.''
The second event was the publication, in 2004, of ''The Wisdom of Crowds,'' by James Surowiecki, a business columnist with The New Yorker.
Mr. Surowiecki's title was purposely meant to echo -- and contradict -- Charles Mackay's famous 1841 work, ''Extraordinary Popular Delusions and the Madness of Crowds,''
which Mr. Surowiecki describes, correctly, as ''an endlessly entertaining chronicle of mass manias and collective follies.''
No one argues that crowds don't sometimes go mad; from Dutch tulips to dot-com bubbles, the evidence is pretty irrefutable.
But Mr. Surowiecki set out to show that far more often, the crowd got it right.
His book is filled with examples of the power of ''collective intelligence,'' as he likes to call it.
For instance, Mr. Surowiecki describes a case in which a naval officer located a sunken submarine by asking people with bits of specific expertise to take their best guess.
Their collective answer turned out to be within a few hundred yards of the submarine's location.
Another example came on Jan. 28, 1986, the day the Challenger shuttle exploded.
All the stocks of rocket makers were down that day, of course, but by far the hardest hit was Morton Thiokol -- which made the faulty part that was responsible for the disaster.
The stock market is nothing if not a prediction market writ large.
But how could the market possibly have known about Morton Thiokol's culpability on the first day?
No information had been revealed.
There was no excessive insider selling.
There wasn't even any media speculation as to the culprit. Yet, somehow the market knew.
Two of the people who read Mr. Surowiecki's book were Eric E. Schmidt, the chief executive of Google, and Bo Cowgill, a young Google executive.
Being a forward-thinking geek, Mr. Cowgill decided to set up some prediction markets at Google, and management gave him the go-ahead.
He's been doing it for a year now.
The Google market is internal only -- the voters are all Google employees.
To avoid insider-trading problems, Mr. Cowgill stays away from any stock price or quarterly earnings questions.
And to entice people to participate he gives away T-shirts.
And he asks pretty useful questions: ''When will a product launch? How much will a particular feature be used? How many full-time people will accept jobs at Google in the next quarter?'' he said.
The utility of such forecasting is clear: it is important for companies to know when a product will be introduced, and tapping into the collective intelligence of employees to predict the date is at least as good a way to find out as talking to the project manager.
In fact, it is probably a better way; at a recent conference, Mr. Cowgill presented a series of slides showing that Google's internal market was amazingly accurate, especially in markets in which lots of people participated.
Google is hardly the only company doing this.
Eli Lilly has used internal markets to forecast drug development. Hewlett-Packard has become a fan.
Emile Servan-Schreiber, the chief executive of Newsfutures, sells software to companies that helps them set up prediction markets.
His first customer, in 2003, was Eli Lilly.
Now, he says, he is working with 12 to 15 companies.
Yahoo has gone about it a different way, setting up a public market called Tech Buzz.
It allows people to make bets on which technologies will be popular in the future; the point, for Yahoo, is to get out in front of popular coming search terms.
''The more we know about trends, the better we can adapt our search services,'' said David Pennock, who runs the predictive markets for Yahoo.
Still, it's hard to know for sure whether predictive markets will turn out to be the next big thing.
''There is a lot of interest, but we're still missing the big success story,'' said Robin D. Hanson, a professor at George Mason University and a reigning expert in the field.
''People are trying it on small, cute things. We haven't seen a company that's made $1 million using this stuff.''
Indeed, Mr. Cowgill told me that he really had no idea how Google's management used the forecasts generated by the company's prediction markets.
Mr. Servan-Schreiber said the companies that were showing interest were ''early adopters.''
One of his clients, Corning, has set up a prediction market to gauge demand for L.C.D. screens, which it manufactures.
''Corning has billions on the line, and it needs to be able to assess demand,'' Mr. Servan-Schreiber said.
Maybe that experiment will turn out to be the success story Mr. Hanson is looking for. (Corning, alas, declined to comment.)
The real problem for prediction markets is that the notion is so counterintuitive.
We're used to the idea that experts, full of specialized knowledge, will get it right far more often than a crowd of people with no special insight.
The thought that the reverse is actually closer to the truth is hard to get one's head around.
''I'm not sure why it works,'' Mr. Mauboussin said.
But then he offered a theory.
''All of us walk around with a little information and a substantial error term. And when we aggregate our results, the errors tend to cancel each other out and what is distilled is pure information.''
Myself, I'm going with the ''Shakespeare in Love'' theory.
You recall, surely, the producer played by Geoffrey Rush.
Whenever he was asked how it was that a play that seemed to be such a hopeless muddle during rehearsal was transformed into a gem on opening night, he had a stock reply, one that seems to describe prediction markets perfectly:
''It's a mystery.''
Let me tell you why I think prediction markets work.
They do so because they mirror quantum reality.
It's that simple.
And that's all I'm going to say about that — for today.
Maybe you'll visit again sometime soon to find out — along with me — the rest of the story.
Sure hope so.
Instant Office Chair
Their name, not mine — maybe they run a different sort of office, what?
- From the website:
This fully adjustable, collapsible chair and ottoman cradles your back while providing ample work space to catch up on paperwork and reading outdoors.
The patented Backtracker™ support system can be adjusted both vertically and horizontally to help you find the most comfortable seating position, and the deep seat supports knees and legs to ease strain on your lower back.
A laptop tray slips easily over the mesh arms for a convenient desktop-like surface for books or a computer, and side pockets hold magazines, books, or your laptop when not in use.
The chair and folding ottoman collapse easily for storage and can be carried in the included shoulder bag.
Crafted from lightweight, powder-coated steel for ease of transport and long-lasting, rust-proof durability.
33"H x 31-1/2"W x 22"L.
$69.95 (laptop computer, beverage container, magazines and notebooks not included).
Helpful Hints from joe–eeze: The history of [non–violent] dust bunnies
Without further ado, then, the master of the short form speaks.
- Dust Bunnies
Q.How do dust bunnies form? Do they prefer new houses or old? Bare wooden floors or carpets? What can be done to keep them at bay?
A. Dust bunnies form from the surprisingly large supply of stuff in the air, including fibers from clothing fabrics and carpeting; hair; animal fur and dander; and especially human skin cells and the dust mites that feed on them, according to Joseph Laquatra Jr., professor of design and environmental analysis at the College of Human Ecology at Cornell.
"Fibers have an electric charge that causes things to stick to them," Dr. Laquatra said, "so dust bunnies are more common in carpeted houses, which have a larger supply of fibers."
"People shed dead skin cells constantly, so it doesn't matter how old or new the house is," he said.
But because dust mites need moisture to survive, a dehumidifier can help keep them away.
But Dr. Laquatra says that only constant cleaning can foil dust bunnies and the unseen particles in the air, and that cleaning is especially important if someone in the house has allergies or asthma, because the proteins in household dust are asthma triggers.
He recommends vacuum cleaners with high-efficiency particulate air filters (called HEPA filters), because conventional vacuums pick up only some of the dust but spread around the rest through the exhaust.
UV Black Light Pen — Episode 3: 'Can be used to view uranium marbles'
Hey, your guess is as good as mine.
From the website:
- Black Light Pen
This pen comes with a black light in the cap and writes with "invisible" ink.
Can be used to write secret messages, or to view uranium marbles.
Works very well for travel!
[via Shawn Lea and everythingandnothing]
You know, I've been thinking — maybe it's not really Milla Jovovich running around in those spray–painted–on outfits in the new movie.
It could be Shawn Lea in her other life.
I mean, come on: has anyone ever seen Shawn Lea and Ultraviolet in the same room?
I rest my case.
booseytones — 'Classical ringtones for the discerning phone'
It's hard out here for a Shostakovich lover.
Boosey & Hawkes, a major publisher of classical music, offers over 300 pieces from its catalog as $2.99 ringtone downloads.
Bonus: you can listen to each and every one free before you buy.
[via Jacob Hale Russell and the Wall Street Journal]
Hand Deodorizing Garlic Crusher
I like it.
From the website:
- A true kitchen innovation, this one-piece garlic crusher easily pulverizes garlic with a simple roll, producing a superior flavor.
When done, simply "wash" your hands with it and the 18/0 stainless–steel from which it is made removes the garlic aroma from your hands.
7"L x 1.25"Diam.
$16 (garlic not included).
Even if you don't know garlic from granola this object will still look good wherever you put it.
Audubon's Aviary: Rarely sighted, now visible — but only for the next 44 days
Forty of John James Audubon's magnificent original one–of–a–kind watercolors, painted in preparation for his double–elephant folio print edition of "The Birds of America" (1827–1838), are now on public view at the New York Historical Society's Dexter Hall.
The paintings were sold to the society by his widow, Lucy Bakewell Audubon, in 1863.
Because of their exquisite sensitivity to light, they are only exhibited for a brief period every decade.
This is that period.
After the paintings come down on May 7 of this year they will not be seen again until the year 2016.
If you're in or planning to be in Manhattan anytime in the next 6 weeks, a few minutes spent with the spirit of the great artist might be a good thing.
The New York Historical Society is at 2 West 77th Street; Museum Hours: Tuesdays through Sundays, 10 a.m. to 6 p.m. (to 8 p.m. on Fridays); Admission: $10 (students and 65+, $5; under 12, free); 212-873-3400; nyhistory.org.