Furthermore, if a market for mergers did exist, I would expect to see a lot of employees use their raffle points to short positions that may actually threaten their job security. If Yahoo has a rather strong HR talent, the Microsoft HR department should aggressively try to bias the decision as to not become a casualty of synergy.

True, and I’d say thats why successful companies (such as Oracle and Microsoft) are often run by people with large stakes in them. Presumably you’d also have a constant evolution of corporate charters which governed decision-making processes (hopefully helping to weed out bad agents), but I don’t know how much of modern corporate structure is set in stone by law. Some of what many boards of directors do seems somewhat incestuous to me.

I don’t think its clear that MSFT and YHOO were wrong not to use a prediction market (or at least one publicly known of) to assist in their decision.

Most economists might agree that X policy will lead to Y outcome, and this might be taken as an endorsement by policy-makers, whereas if you also asked economists whether they would think Y outcome would be considered good by economists in the future, the economists in the present might generally say no.

Of course, a problem here would be conflating expert values with the values of the general public. Experts probably see things more clearly than the general public in terms of what is, but might have much different values from the public generally, and assuming this, experts generally might not act as good proxies for the public. Perhaps a bet on the opinion of intelligent lay people in 5 or 10 years time would be useful.

Mike, my first thought is that markets give experts incentives to participate just like anyone else. Experts of course tend to be more sure of their opinions and thus would be more likely to participate in the market and add their private information than laymen might be (so your pool of “experts” would be self-selected from incentives in this case). So I’m not really sure why we’d necessarily care to predict the outcome of “expert” polling.

My first thought on the reasons prediction markets aren’t used in cases like this is the degree of private information consolidated in the firms’ executives. Their long-term business plans to create value from the merger are not going to be things they are going to want to share with others. Given this, the executives might not feel (perhaps arrogantly) that outsiders have enough knowledge to make accurate predictions. Has anyone written anything on practical uses of prediction markets in cases like this? I am also skeptical I would be able to use them to guide many business decisions for the above reasons.

Or it also could be that most haven’t heard of prediction markets yet. Most of the executives I’ve talked to haven’t. The last issue of the HBR talked about the Delphi method, but did not mention prediction markets.

My impression is a decision market would be the best tool for guessing expert consensus in the future compared to other tools. Perhaps I am wrong about this too!

Robin, would the estimates not be valuable? Or is it they are valuable but it’s tough to persuade decision-makers? I’m not quite sure of your question.

James, yes markets can have secret prices, though we expect them to suffer an accuracy penalty in this case.

Grant, this is conditional stock futures.

Psuedo, there are not transparent predictions like this in ordinary stock prices.

Companies are rarely serious about anything. The interesting question is whether the managers are serious. These examples are easily explained as principal-agent conflict and tell us little about the managers’ beliefs. It’s also possible that they (correctly!) believe that if they let the genie out of the bottle, they’ll be forced to use it in examples like these.

I would expect prediction markets to have their greatest effect when they are not (effectively) duplicating an existing market.