Improving the Idea Screening Process within Organizations using Prediction Markets: A Theoretical Perspective

Prediction markets have been identified as a valuable mechanism to evaluate and select ideas in the corporate innovation processes, because these markets leverage the collective wisdom of the entire organization. However, initial studies report low prediction accuracies and their usefulness is being challenged. A better theoretical understanding of idea markets is needed. Based on economic theory, experimental economics, and existing prediction market research, we present such a theory for the accuracy of idea markets. The theory is used to explain why current markets may have low prediction accuracy, and also why idea markets have great potential for improving idea screening.