Until recently at Hewlett-Packard, a group of managers would sit through unending meetings to predict future prices of key computer supplies – information the company would then use to plan its purchasing strategy. Today, a prediction market at HP accomplishes the same task, but with better accuracy in far less time.

A prediction market is a stock market for ideas, where people can buy and sell “stock” in different outcomes, which impacts their relative prices. Between 1868 and 1940, prediction markets forecasted elections before advanced polling. They made a comeback in 1988, when the University of Iowa started the first electronic prediction market focused on economic and political events, such as elections.

The idea behind prediction markets is that the aggregated knowledge of diverse individuals produces a prediction with greater accuracy than a small number of experts. Diversity is critical here – if everyone starts out with the same knowledge, predictions will be the same and betting will therefore be negligible.

Though they are not infallible, prediction markets are strikingly accurate. In the 2006 Senate elections, for example, no public opinion poll predicted all 33 races correctly, but bettors at Tradesports did. Today, people use prediction markets to forecast everything from the popularity of movies to influenza outbreaks. In the corporate world, ArcelorMittal, Best Buy, General Electric, HP, Nokia, and Samsung have been using prediction markets to divine public reaction to new products, next quarter’s sales revenues, whether products will be ready on time, and future commodity prices. A comprehensive study at Intel concluded that prediction markets are at least as accurate as forecasts by Intel’s management, and often as much as 20% better.

Small companies have been slower to embrace prediction markets, but Entrepreneur.com points out that there is no reason they should miss out on the benefits. Markets can work well with relatively small groups of traders, and a small employee base can be supplemented with suppliers, vendors, and other outsiders. Small companies often seek the same answers as big corporations and can save precious time and money by replacing complicated market research with prediction markets when appropriate.

Despite all their benefits, prediction markets are only appropriate in cases where predictions are separable into neat categories: Will Microsoft release its software before November, in November, in December, in January, in February, or later than February? Will Amazon.com sell more books, iPods, or 500-thread-count sheets next month? This condition limits the prediction market’s usefulness when companies want to aggregate opinions without influencing people with a preconceived framework of possible responses or when nuanced answers would be more appropriate.

MixedInk sees prediction market software as a kindred tool. MixedInk steps in where prediction markets leave off by allowing people to respond to open-ended questions and provide more complicated answers. In addition to asking which of five products will be most popular using a prediction market, a company could use MixedInk to ask its employees to help conceive of its next innovative product or design a marketing strategy.

Using democratic, meritocratic aggregation tools like prediction markets and MixedInk, companies can truly benefit from the vast knowledge base of their employees quickly and easily. Of course, deciding to use these tools requires leaders to recognize employees’ wisdom, which can mean a big shift for some companies…but that’s a subject for another post.

Sparse posting as of late – sorry about that. We’re up to our ears trying to ready the site for release. The good news is we’re on track to do so this winter, as planned.

Last week, I was at the Networked Journalism Summit, a conference organized by Jeff Jarvis and David Cohn, “bringing together the best practices and practitioners in collaborative, pro-am journalism” at CUNY.

In a word, it was…awesome (sorry, I’m an entrepreneur, not a journalist!). It was both encouraging that so many really smart people are experimenting with ways to democratize the media, and a relief that no one has yet been able to find all the answers – meaning that MixedInk can help to provide part of the solution.

The big unanswered questions that seemed to keep coming up were:

1) how the media will be able to make money without sacrificing journalistic quality and integrity (and whether advertising revenue will ever be sufficient);
2) how professional and amateur journalists can coordinate and divide responsibility effectively to produce high-quality, accurate content; and
3) how the public can be motivated to contribute in a way that adds value.

From MixedInk’s perspective, the event was unquestionably a success. In the afternoon, I manned one of several ‘tool’ tables, sandwiched between DayLife and Topix, two other innovative startups in this space. A number of leading media outlets dropped by our table and expressed very strong interest in viewing a demo when it’s ready next month. Several said they would even test our platform with their readers. Though it depends what comes of these initial conversations in the next couple of months, I’d say Jeff Jarvis and David Cohn accomplished their goal of focusing the event on action rather than talk.

Amid the excitement, there was a potentially depressing moment during one of the morning sessions. Jay Rosen, the brilliant NYU journalism professor and founder of newassignment.net, was asked whether there’s any way to avoid using a community leader to tightly moderate and channel contributors’ energy in a productive direction. To my dismay, and likely that of others in the room, he responded, “The dream of a self-perpetuating content production system is an illusion.” He might well have been describing MixedInk, though we would say our content production system is “community led” rather than “self-perpetuating.”

Unfortunately I didn’t have a chance to speak with Jay later in the day, but if I had (and managed to keep my wits about me), I would have said something like this: “With all due respect, we look forward to proving you wrong, Jay. Relying on heavy moderation is not scalable, it’s less democratic and it may even be less meritocratic. Given the right structure and application, the community can be trusted to produce quality content. We won’t hold it against you, though, if we’re ever lucky enough that you want to work with us ” (Yes, I would have smiled and winked at the end.)

You can find a lot more detail about the day in the following accounts:

• Jeff Jarvis’s post mortem
• Scott Anderson’s (of the Chicago Tribune) version
• NPR’s take (audio)

Thanks again to Jeff and David for putting this fantastic event together – and for highlighting MixedInk as an innovative tool in the new media arsenal.