SAN FRANCISCO (Reuters) - Prediction markets have been used to forecast election outcomes, football games and even the capture of Osama bin Laden.
Brian Shiau built one to forecast videogame sales.
The 25-year-old Princeton economics graduate is founder of the simExchange, a Web site to trade virtual securities whose prices are tied to a game’s sales or critical reviews.
“I’m a big believer in the market, that it is the best way of aggregating information. Due to the law of supply and demand and profit-seeking, it has a better idea of what a price should be than any other way of determining prices,” Shiau said.
Inspired by James Surowiecki’s 2004 book “The Wisdom of Crowds”, the simExchange launched in November 2006 and now claims 8,600 registered users.
Small, perhaps, but that’s a third more than it had three months ago. Moreover, the exchange is gradually carving out a reputation as a source of intriguing data for an industry that is becoming increasingly difficult to predict.
Not only is the industry hitting a growth spurt — U.S. sales jumped 43 percent last year, to $18 billion — but the success of Nintendo’s Wii and games like “Guitar Hero” took many by surprise and illustrate how quickly games are going mainstream.
The simExchange caught people’s attention last August when it correctly predicted the emergence of Take-Two’s “BioShock” as a sleeper hit.
SimExchange activity showed strong sales expectations for the game. Sure enough, positive reviews poured in and the resulting sales boom sparked a rally in Take-Two shares.
At least one prominent industry analyst, Wedbush Morgan’s Michael Pachter, cites simExchange data in his monthly sales previews, and major media refer to forecasts made on its 24/7 market.
Shiau hired an analyst, Jesse Divnich, to help interpret the exchange’s data and provide commentary.
“I looked at it as a threat,” Divnich said. “As an analyst out there, instead of my models, there is this market that exists where 8,000 registered users are trading stocks, and how can I compete with that?”
Shiau is quick to point out the exchange isn’t a flawless crystal ball.
“The idea of the wisdom of crowds is not a doorway into the future, it’s not a time machine, but the idea is to provide you, on average, a better answer than what an individual can provide,” Shiau said.
Here’s how it works.
When you join the site, at www.thesimexchange.com, you’ll get 1 million units of a virtual currency called DKP, a term rooted in online role-playing games where it is used to determine how virtual loot is doled out.
You use your DKP stash to trade in any of dozens of futures contracts, such as for monthly sales of a game.
Take Nintendo’s “Super Smash Bros Brawl”, slated for a U.S. launch next month.
The March contract for “Smash Bros” was priced at 185.52 DKP Wednesday evening, meaning the long-awaited game is expected to sell more than 1.85 million copies that month.
Think the hype is getting ahead of reality? Offer a lower price. Sure it will be an even bigger blockbuster? Bid it up.
The contract pays 1 DKP per 10,000 copies sold, and settles when market research firm NPD issues its March report. If you bought 100 shares at 185 DKP and the game sells 2 million copies, congratulations, you turned a profit of 1,500 DKP.
It’s similar to the Hollywood Stock Exchange, a prediction market that forecasts movie box office takes and Oscar chances, but there’s definitely a “meta” element to the simExchange since it’s essentially an investment game about games.
Indeed, Shiau refers to simExchange users as “players”, and offers arcade-style leaderboards that show which investors are doing the best.
“It’s really kind of like a game. People do get into it, we feel sometimes they are almost too serious about their virtual currency. When they are in the mood of the game and trying to win, they are pretty serious about whether they lose any of their virtual money,” Shiau said.