Posted by Bo Cowgill, Economics Group

Earlier on that blog, we shared some exciting early results from our firm’s implementation of prediction markets. At last Friday’s meeting of the American Economic Association, we shared the results of a deeper study, “Using Prediction Markets to Track knowledge Flows: Evidence From Google,” that uses prediction markets to show how organizations process knowledge and reply to external events. Here are some interesting findings:

• Traders in the same location tend to manufacture the same trades at the same moment. The trades of cubemates within a small radius is the best predictor we found. By using a record of historical office changes, we could observe that the correlation begins shortly after public are seated nearby. It makes sense, considering the physical proximity enables easy communication. As Eric Schmidt (our CEO) and Hal Varian (now our Chief Economist) advised in 2005: “The best way to assemble communication easy is to put team members within a few feet of each other. No telephone tag, no e-mail delay, no waiting for a reply.” As you can see below, our finding about the importance of proximity holds, even once we history for many other factors.

• Although we did find strong correlations among professional and
  social contacts, these were substantially weaker than the correlations for micro-geography. We additionally measured the influence that humans on similar projects, in similar places in the organization and with similar demographic characteristics exert on each other. that helped set up that geographic proximity — and not some other type of similarity — was responsible for the correlations we saw.

• Despite the markets’ strong forecasting abilities, there is a slight optimistic bias driven mainly by new employees. On average, outcomes that were good for Google were overpriced by 20%. that bias was strongest on days after appreciations in Google stock and, ironically, for outcomes under our own control! We plus find biases against extreme outcomes and short selling. Given a range of five outcomes, the middle ones were typically overpriced and unprofitable by comparison with the outliers.

Although the proof is in the paper, nothing quite helps like a graphic. Below you can see a snapshot of trading in one of our offices. The areas where employees are making profitable decisions is green, and the areas where employees are making unprofitable decisions is red. There are about 16 profitable traders in that big green blotch in the middle!

Orginal post by Karen