Why don’t more businesses use prediction markets?

Last week in The New York Times (TimesSelect), Joseph Nocera quoted Robin Hanson as saying private businesses had not made a breakthrough with the use of idea futures.  It seems natural to let your employees bet on future business conditions, the success of product lines, or broader questions of corporate strategy.  Microsoft and Google and a few other companies have played with the idea, but it does not (yet?) seem to be taking off.  Why not?

1. Prediction markets threaten the hierarchical control of top managers.  It would become too obvious that most managers are idiots, unable to predict the future.

2. Prediction markets make a big chunk of the bettors into "losers."  Yet within a company morale is all-important.  Businesses proceed by soliciting feedback, and by reshaping their plans to pretend that everyone is on board and has an ego stake in the final outcome.  Prediction markets make this coordination more difficult.  Once people make bets, they start rooting for their bet to win and for the other bet to lose.  They move away from maximizing the value of the firm and develop an oppositional mentality vis-a-vis other employees.  Furthermore it is disruptive to have a running tally on who are the winners and losers each day.

3. No matter what they pretend, businesses are not much interested in forecasting many future variables.  Successful businesses find product markets they can control for long periods of time.  They do a few things really well, and let a surprisingly large number of tasks slide.

4. We already have implicit betting markets in the form of resource prices.  When the information contained in those prices is sufficiently important, institutions will be organized in terms of "markets," rather than "firms."  Or firms can look at resource prices in outside markets for the information they need.

5. Most employees have no rational basis on which to bet.  If someone knows the truth, but is otherwise locked out from credibly signaling that knowledge to management, something is wrong with the organization of the company.  The small prizes from corporate prediction markets won’t be enough to elicit that knowledge from him in any case.

6. The corporate beast is far more constrained than most outsiders imagine.  Interest groups must be courted, coordinated, and sometimes fought every step of the way.  When it comes to choice, there are fewer degrees of freedom than one might think.  The real question is not what to do, but rather having the will and effectiveness to do it.  A bit like international free trade, no?  Prediction markets don’t help much in this regard.

7. When reward systems are created, employees view them as a means to distribute further privileges to insiders and favorites.  Prediction markets would be viewed the same way and in fact this might be true.  Who else is going to win all those bets?  Do corporations really need more insider favoritism?

Your thoughts?  Here are five open questions about prediction markets.