March 11, 2006 | New York TimesEvery year, as the Academy Awards approach, Michael J. Mauboussin, an adjunct professor at Columbia Business School, asks his students to vote for the winners in 12 categories, and he tallies the results and compares the students' predictions with the winners. This experiment is done to show the power of prediction markets, in which groups of people guess or bet on something, with the results aggregated into a consensus. Prediction markets, while not perfect, are surprisingly accurate -- certainly more accurate than individual experts or polls, research has found. The granddaddy of prediction markets, the IOWA ELECTRONIC MARKET, which the University of Iowa has run since the late 1980's, allows people to make election predictions. The consensus almost always beats the polling data. In the last presidential election, for instance, it not only steadfastly predicted a Bush victory, but came within 1.1 percentage point of the actual result.
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