The Betfair Prof / Leighton Vaughan Williams / 14 July 2008 /

For some reason, people buy popcorn and drinks at the cinema despite massive prices, and people often go for the longest queue at McDonalds. The Betfair Prof, Leighton Vaughan Williams, asks why...

One of the fundamental talking points of proponents of prediction markets is the wisdom of the crowd. After all, this seems to explain why you can ask 100 people at random how many jelly beans are in a jar and apparently come up with an average somewhere near the truth.

Quite so, but what puzzles one very intelligent fellow of my acquaintance is why, if this is so, do people almost always buy popcorn and drinks at the cinema and pay inflated prices rather than bringing their own, even when a convenience store is footsteps away. Why again, he asks, did people while he was working at McDonald's seemingly always go to the longest queue which was typically in the middle of the counter?

He tells me that he was so baffled by this counter-intuitive behaviour that he queried the store manager who confirmed that the revenues were always higher at these tills. Why, he asks, is the crowd so wise in some environments and yet apparently so dumb in others?

At a local Tesco, he tells me, there's a tendency for people to go from left to right and end up at the tills at the rear, so much so that he himself always makes a point of walking to queue at the tills at the front that always seem shorter. Of course, this is just perception of a few stores by one observant witness, and a data set bigger than one is likely to obtain casually would be required to confirm these observations.

Just generally, though, it does seem the case that the madding throng does seem to behave more logically, more rationally in some circumstances than others, as does the individual.

The question for those studying prediction markets is whether the apparently irrational behaviour of the crowd in some branches of McDonald's or Tesco translates into a market which generates irrational activity and therefore unreliable forecasts of the probability of defined events occurring or not.

The bottom line here is perhaps not what people do when part of a crowd but what the outcome of that activity is for our perceptions of the future. OK, the average person may dally longer at the fast food outlet or the supermarket than they need do, and my experience at Venice Marco Polo airport last weekend seems to support this interpretation of reality, but where real money is at stake (popcorn buyers at the cinema perhaps excepted - though that's another story!) the markets somehow seem to get things sort of right.

How else did the prediction markets call every single US Senate seat correctly in 2006? How did they call every single state right in the 2004 US Presidential election? Maybe money is a bigger motivator than time, or maybe people are quite happy to tarry at the tills? Or maybe it's part of a puzzle we haven't quite resolved. Yes, if crowds are so wise, why DO people end up in the longest queue?

Professor Leighton Vaughan Williams is the Director of the Political Forecasting Unit and Betting Research Unit of Nottingham Business School, Nottingham Trent University, and Editor of the Journal of Prediction Markets

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