Harrah's New Twist on Prediction Markets

In a pilot, casino staff will forecast customer spending, which could help boost revenue—and may prompt Harrah's to form more diverse teams

By John Hagel and John Seely Brown

Almost 15 years ago, Lew Platt, the former chief executive of Hewlett-Packard (HPQ), observed that, "if only HP knew what HP knows, we would be three times more productive." This quote became a mantra for the knowledge management movement. Companies invested large sums of money to codify knowledge and connect people.

Unfortunately, many of these initiatives foundered. There were at least two problems. The most valuable knowledge is difficult, if not impossible, to codify. And tools for connecting people run afoul of widespread incentive structures and cultures that strengthen walls rather than foster networks.

There's an even more fundamental issue. Knowledge management, at least as conventionally applied, focuses on tapping into existing knowledge. It spends much less time finding better ways to generate new knowledge.

Harrah's, the casino entertainment company, is beginning to explore how to create commercially useful knowledge by applying a much-hyped knowledge management tool—prediction markets—in a very new context.

The Prediction Market Paradox

Prediction markets are platforms that invite participants to speculate on uncertain future events (such as probability or timing) by buying "shares," with payoffs tied to the eventual outcomes. These hit public attention 20 years ago, and the first corporate prediction market launched a couple of years later. Since then, they have been used in a broad range of industries, most often to estimate the actual release dates for, and likely success of, new products.

Harrah's is setting up a pilot prediction market to forecast customer activity in one of its domestic casino operations. In this market, Harrah's employees will forecast customer spending activity in Harrah's casino based on the employees' front-line experience and perspectives. Harrah's hopes to understand better employees' diverse approaches to generating these forecasts and to explore possible initiatives to increase revenues. The company has also configured "inclusion to innovation" teams to draw on the cognitive diversity among its employees. This taps into the thinking of Scott Page, a professor at the University of Michigan, who published a fascinating book last year, The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools and Societies.

Page argues that diversity should not be confined to differences in identity—for example, race or gender. He makes a powerful case that harnessing differences in how we view the world helps us generate more insight about that world and to be more innovative in our business initiatives. Since the power of prediction markets hinges on effectively tapping into cognitive diversity throughout an organization, Page also argues convincingly that if members of a group do not have enough diversity in their perspectives, prediction markets can actually produce dismal results.

Diverse by Design

Fred Keeton, Harrah's vice-president for external affairs and the chief diversity officer, clearly agrees. "We need to focus more broadly on cognitive diversity, rather than only on identity as a source of diversity," he observed to us in an interview. "This will allow us to configure teams that generate superior economic value by coming up with better solutions to real business problems. In this way, diversity becomes much more than a compliance issue or an abstract ethical value—it becomes a commercial necessity."

The "inclusion to innovation" teams are relatively small teams formed on an ad hoc basis to address specific business challenges within Harrah's more broadly. Team members are selected based on the scope of their relevant experiences as well as on a cognitive diversity profile emerging from answers to a questionnaire designed to reveal differences in approaches to problem-solving.