Prediction markets strong at forecasting US presidential elections, says new management insights

A case study of the 2004 U.S. Presidential election by researchers at Yale shows that prediction markets are proving to be a strong forecasting tool, one that may have an impact in calling the current presidential contest between Democrat Senator Barack Obama and Republican Senator John McCain, according to the Management Insights feature in the current issue of Management Science, the flagship journal of the Institute for Operations Research and the Management Sciences (INFORMS®). Management Insights, a regular feature of the journal, is a digest of important research in business, management, operations research, and management science. It appears in every issue of the monthly journal. 

"Modeling a Presidential Prediction Market" is by M. Keith Chen, Jonathan E. Ingersoll, Jr., and Edward H. Kaplan of the Yale School of Management.

In their study, the authors relate that many firms are establishing internal prediction markets, while public prediction markets increasingly cover all manner of business, economic, and political events. Managers must decide whether to treat these markets seriously, especially when they price complex, interdependent events.

The authors' case study of the 2004 presidential election market suggests that they should. They explore the consistency of security prices associated with presidential election contracts that traded in the Intrade.com prediction market during the run up to the 2004 presidential election. In that prediction market, traders placed bets on various election outcomes such as "George Bush will win both Florida and Ohio" and "George Bush will be elected President of the United States."

The authors find that these prices were mutually consistent with the rules governing the Electoral College, and that traders appeared to quickly and efficiently assimilate new information as it unfolded over the campaign.

Turning to business, the authors suggest that prediction markets can be a valuable tool for managers who face decisions that may depend on the outcome of complex and interdependent events. Established prediction markets will likely do a good job assessing events in which interest is widespread. For events of narrower interest, establishing an internal prediction market may be an effective way to aggregate information within the firm.

The current issue of Management Insights is available at http://mansci.journal.informs.org/cgi/reprint/54/8/iv. The full papers associated with the Insights are available to Management Science subscribers. Individual papers can be purchased at http://institutions.informs.org.  Additional issues of Management Insights can be accessed at http://www.informs.org/site/ManSci/index.php?c=11&kat=Management+Insights.

The other Insights in the current issue are:

• An Integrated Decision-Making Approach for Improving European Air Traffic Management by Yael Grushka-Cockayne, Bert De Reyck, Zeger Degraeve
• Dynamic Allocation of Airline Check-In Counters: A Queueing Optimization Approach by Mahmut Parlar, Moosa Sharafali
• How Near-Misses Influence Decision Making Under Risk: A Missed Opportunity for Learning by Robin L. Dillon, Catherine H. Tinsley
• Managing the Inventory of an Item with a Replacement Warranty by Wei Huang, Vidyadhar Kulkarni, Jayashankar M. Swaminathan
• Inventory Models for Substitutable Products: Optimal Policies and Heuristics by Mahesh Nagarajan, S. Rajagopalan
• Confidentiality and Information Sharing in Supply Chain Coordination by Lode Li, Hongtao Zhang
• Queuing for Expert Services by Laurens G. Debo, Beril L. Toktay, Luk N. Van Wassenhove
• Fluid Models for Overloaded Multiclass Many-Server Queueing Systems with First-Come, First-Served Routing by Rishi Talreja, Ward Whitt

INFORMS journals are strongly cited in Journal Citation Reports, an industry source. In the JCR subject category "operations research and management science," Management Science ranked in the top 10 along with two other INFORMS journals.

The special MBA issue published by Business Week includes Management Science and two other INFORMS journals in its list of 20 top academic journals that are used to evaluate business school programs. Financial Times includes Management Science and four other INFORMS journals in its list of academic journals used to evaluate MBA programs.

Source: Institute for Operations Research and the Management Sciences