Sunday, December 31, 2006

Prediction markets as a source of independent and continuous evaluation for development projects?

Imagine that at the beginning of a development project, even during the planning stage, the designers identified a number of observable events, which were expected to be achieved at different points in time throughout the lifetime of the project. Some might be very immediate, such as spending 90% of the annual budget by the end of each year, while others might be much longer term in nature, such as primary school completion rates in district x exceeding 90% by 2010. Well something like this happens already in most development projects, you might say. These types of events are described in the planning documents, and associated work plans. And later on, in progress reports.

But these statements of intentions are often not very publicly accessible, and they rarely have much consequence. Cutting off funding if specific performance targets are not reached rarely happens (in my experience) and probably for good reason, it is a very crude “sledgehammer” type of response. And often the donors themselves are not independent judges, they need their projects to be seen to be succeeding, and cutting off funding is effectively a criticism of their own previous judgements, as well as the recent performance of their grantee.

There is an alternative which might be able to provide more independent and continuous assessments of project progress. These are called "prediction markets" (also sometimes called information markets, decision markets, idea futures, and virtual markets).

Prediction markets allow a group of people to express an opinion over a period of time about the probability of an event occurring. A question is posed and people buy and sell shares in stocks representing possible answers to that question. The highest priced stock at the end of a period of time is the group's prediction. (A definition provided by

Prediction markets have been championed in James Surowiecki’s 2004 book, “The Wisdom of Crowds”, and widely discussed and used since then (see list of links below). They have been used to successfully predict political events (election outcomes), sports events (winners), market success of commercial products, and many other types of events. Recent well known users have included Google, Yahoo, Microsoft, and HP. The most important claim that has been made is that prediction markets can generate more accurate predictions of events than individual experts or highly structured planning / design processes involving multiple specialists.

It is possible that prediction markets could also be usefully applied to development projects. Two types of benefits might arise.

  • Firstly, the existence of the markets might generate incentives for a wider variety and larger number of people to become engaged in a discussion about aid and development. Even prediction markets that do not involve real money bets do manage to attract large numbers of participants, who get rewarded by social recognition and self-esteem, if they win.
  • Secondly, those responsible for aid budgets might get more accurate information about the expected performance of their portfolio of projects than they do from those who are directly responsible for the implementation of these projects.

The challenge would be how to create incentives for project managers to publicly disclose information about their project and its performance. For example, via project websites. Rewards could be given to project managers where:

  • the number of participants in the prediction market was large, relative to previous comparble markets
  • the most favored bet was successful (predicted the observed outcome)

But this then raises the question of who would provide the rewards. Donors to the project might have the same reservations as project manegsr about disclosure of information, and reluctance to see negative predictions proved correct. The alternative would be to find independent third parties, possibly specialist NGOs, who might have an interest in promoting greater transparency by aid agencies.

Project prediction markets could have different uses at different stages. During the implementation of the project the prediction market would be providing real time feedback on expectations about whether a project was likely to succeed, that might encourage corrective behaviours by project managers. At the end of the project, when success/failure has been defined and winning bets paid off, it would be useful to compare the project manager’s own bets against the market as whole. And to analyse any discrepancies between them, and any lessons to be learnt from these.

Prediction markets can be open to the public, or internal (as used in Google, Yahoo, Microsoft, and HP). The proposal outlined above is for the use of public prediction markets in development project outcomes. But to allow and encourage project "insiders” to participate, on condition that their bets are disclosed. In the same way that directors of companies can buy and sell shares in their own company, but they are normally required to disclose these dealings.

Incidentally, the operation of prediction markets might also generate a modest income for development purposes, by using open source, proprietary or web-hosted software to host the market (see the Wikipedia listing).

Happy New Year!
Rick Davies

An experiment

Please take part in this very experimental prediction market, where the prediction concerns the achievement of one of the Millenium Development Goals (MDG). Go to
You can leave your comments and questions in the Discussion section. Note that you have $5,000 token dollars available to spend. These are called "inkles". Bear in mind that this particular MDG prediction market is very much in the beta stage, where I expect there will be quite a few problems that will need to be sorted out.