Managing Risk Using Prediction Markets

Abstract

Prediction markets have emerged fairly recently as a promising forecasting mechanism to handle efficiently the dynamic aggregation of dispersed information among various agents. The interest that this mechanism attracts seems to be increasing at a steady rate, in terms of both business interest and academic work. Applications of predictive markets span the areas of political predictions, sports prediction, Governance to name a few. This paper makes a bold attempt to explore the use of predictive markets for effective risk management process in projects to derive certainty in projects. The key components of prediction markets i.e. the specification of contracts traded in a prediction market, the trading mechanism and finally the incentives provided to ensure information revelation will then be presented. Innovative concept of fusing Predictive Markets for Risk Management will then be outlined. How the probability of Risk Occurrence can be predicted with a greater degree of certainty using the predictive markets and aggregation of wisdom of project stakeholders will be described. Further areas to be explored such as a framework for deployment of Predictive markets in a project context, guidelines for use are then presented. We close with conclusions and area for further investigation. Case Studies complement the paper and the model proposed.