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Students: Dissertation: Richard Jolly

ABSTRACT

"If only HP knew what HP knows, we would be three times more productive"

Lew Platt, while CEO of Hewlett-Packard

Leveraging the knowledge of an organization is an ongoing challenge that has given rise to the field of knowledge management. Yet, despite spending enormous sums of organizational resources on Information Technology (IT) Systems, executives recognize there is much more knowledge to harves - as expressed by Lew Platt's comment. Prediction markets are emerging as one tool to help extract this tacit knowledge and make it operational. Yet, prediction markets, like other markets, are subject to pathologies (e.g. bubbles and crashes) which compromise their accuracy and may discourage organizational use.

The techniques of experimental economies were used to study the characteristics of prediction markets. Empirical data was gathered from an on-line asynchronous prediction market. Partipants allocated tickets based on private information and, depending on the market yype, public information indicative of how prior partticipants had allocated their tickets. The experimental design featured three levels of feedack (no-feedback, percentages of total allocated tickets and frequency of total allocated tickets) presented to the participants.

The research supported the hypothesis that information assimilation in feedback markets is composed of two mechanisms - information collection and aggregation. These are defined as:

  • Collection - The compilation of dispersed information - individuals using their own private information make judgments and act accordingly in the market.
  • Aggregation - The market's judgment on the implications of this gathered information - an inductive process. This effect comes from participants integrating public information with their private information in their decision process.

Information collection was studied in isolation in no feedback markets and the hypothesis that markets outperform the average of their participants was supported. The hypothesis that with the addition of feedback, the process of aggregation would be present was also supported. Aggregation was shown to create agreement in markets (as measured by entropy) and drive market results closer to correct values (the known probabilities). However, the research also supported the hypothesis that aggregation can lead to information mirages, creating a market bubble.

The research showed that the presence and type of feedback can be used to modulate the performance of markets. The research demonstrated that adding more information feedback increased the precision at the expense of accuracy. The research supported the hypotheses that these changes were due to the inductive aggregation process which creates agreement (increasing precision), but also occasionally generates information mirages (which reduces accurancy).

The way individual participants use information to make allocations was characterized. In feedback markets the fit of participant's responses to various decision models demonstrated great variety. The decision models ranged from little use of information (e.g., allocation in proportion to probabilities), use of only public information (e.g., allocating in proportion to public distributions) and integration of public and private information. Analysis of all feedback market responses using multivariate regression also supported the hypothesis that public and private information was being integrated by some participants. The subtle information integration results indicate the distinct differences seen in markets with varying levels of feedback illustrate an emergent phenomenon (i.e., one that could not be predicted by analyzing the behavior of individuals in different market situations).

The results of this study have increased our collective knowledge of market operation and have revealed methods that organizations can use in the construction and analysis of prediction markets. In some situations markets without feedback may be a preferred option. The research has studied information aggregation and shown support for the hypothesis that it can be simultaneously responsible for the beneficial information processing in feedback market as well as the harmful information mirage induced bubbles. In fact, a market subject to a mirage prone data resembles a Prisoner's Dilemma where individual rationality results in collective irrationality.

 

November 2, 2011

DISSERTATION COMMITTEE
 
Wayne Wakeland, Chair
Barry Anderson
James Wood
Martin Zwick
Steven Bleiler, Graduate Studies Rep.

Link to Dissertation