Idea futures inside the corporation

by on July 7, 2004 at 6:03 am in Economics | Permalink

Read this week’s Time magazine:

Once confined to research universities, the idea of markets working within companies has started to seep out into some of the nation’s largest corporations. Companies from Microsoft to Eli Lilly and Hewlett-Packard are bringing the market inside, with workers trading futures contracts on such “commodities” as sales, product success and supplier behavior. The concept: a work force contains vast amounts of untapped, useful information that a market can unlock. “Markets are likely to revolutionize corporate forecasting and decision making,” says Robin Hanson, an economist at George Mason University, in Virginia, who has researched and developed markets. “Strategic decisions, such as mergers, product introductions, regional expansions and changing CEOs, could be effectively delegated to people far down the corporate hierarchy, people not selected by or even known to top management.”

Here is an example:

Eli Lilly, one of the largest pharmaceutical companies in the world, which routinely places multimillion-dollar bets on drug candidates that face overwhelming odds of failure, wanted to see if it could get a better idea of which compounds would succeed. So last year Lilly ran an experiment in which about 50 employees involved in drug development – chemists, biologists, project managers – traded six mock drug candidates through an internal market. “We wanted to look at the way scattered bits of information are processed in the course of drug development,” says Alpheus Bingham, vice president for Lilly Research Laboratories strategy. The market brought together all the information, from toxicology reports to clinical results, and correctly predicted the three most successful drugs.

What’s more, the market data revealed shades of opinion that never would have shown up if the traders were, say, responding to a poll. A willingness to pay $70 for a particular drug showed greater confidence than a bid at $60, a spread that wouldn’t show if you simply asked, Will this drug succeed? “When we start trading stock, and I try buying your stock cheaper and cheaper, it forces us to a way of agreeing that never really occurs in any other kind of conversation,” says Bingham. “That is the power of the market.”

My take: The idea has most promise when lack of information is the relevant corporate problem. Look for this to be used when corporations must make high upfront investments, as in the drug development or music industries. Other times companies know what must be done, but simply cannot muster the will to do it. Perhaps then idea futures are useful to make this fact “common knowledge.”

The bottom line? Getting kicked out of The Pentagon was the best thing to ever happen to this innovation.

Here is the full story, and kudos to my colleague Robin Hanson, who set the whole thing in motion.

Addendum: Here are additional sources on the initial controversies.

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