Ideas · Knowledge

Prediction Markets – Using Groups to Guess Right

‘Collective wisdom’ is put to good use to tackle three kinds of problems, and complexity is no bar:

Cognition problems: such problems arise when we can only guess the answer – as e.g. about the contents of the jelly bean jar, or about the future. How do we get the guess right?

Coordination problems: how to we coordinate behavior with each other – say in traffic – knowing that everyone else is trying to do the same?

Cooperation problems: how do we get self-interested, distrustful people to work together, even when narrow self-interest would seem to dictate that no individual should take part – as in politics?

Capturing the ‘collective’ wisdom best solves cognitive problems. Four conditions apply. There must be: (a) true diversity of opinions; (b) independence of opinion (so there is no correlation between them); (c) decentralization of experience; (d) suitable mechanisms of aggregation.


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