Prediction Markets as an Aggregation Mechanism for Collective Intelligence

Collective intelligence is the result of the proper aggregation of local information from many individuals to generate an optimal global solution to a problem. Often, these solutions are more optimal than what any individual could have provided. In this article, we focus on prediction markets as the aggregation mechanism for collective intelligence. Prediction markets, like commodity markets, channel inputs from all traders into a single dynamic stock price. Instead of determining the value of a particular good, a prediction market is used to determine the probability of a particular event occurring. We present and discuss five features of prediction markets that urge a collective toward optimal solutions. Through the combination of these features, prediction markets lend themselves to the systematic study of the promising phenomenon of collective intelligence.