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Cant Get a Better Idea!
Idea markets help organisations gain a competitive edge in predicting business developments
Howzzzz . trading in ideas just like stock Sounds improbable, isnt it this unique proposition came to light in the mid 2003 when Pentagon came up with a strategy named Policy Analysis Market (PAM). This scheme encouraged participants to bet on various political and economic happenings, especially concerning the Middle East. The idea of predicting potential terrorist targets also entered the scheme.
It allowed people to trade ideas on potential targets and the ways in which they could be attacked. Each of the possible events had a value assigned to it. Hence, people exchanging ideas were, in fact, trading value a process much similar to trading in stock or commodity.
However this idea had to be scrapped on security grounds. Experts opined that in fervour to earn more value in the exchange, people might provide ideas to terrorists. The plan was labelled terrorism futures market and was denounced as an ethically repugnant entity. Nevertheless, the concept of idea markets was well received by the business community.
Making an idea work:
Hewlwtt-Packard (HP) was one such company that adopted the practice. It so happened that the companys conventional sales forecasts could not sustain the frequently changing environment within its area of operation. Hence, the company was forced to abandon its existing system and adopt idea market.
Charles Plott , an economist at the California Institute of Technology and Kay-Yut Chen, a senior scientist at HP Labs, came up with a new concept that functioned on the following lines:
• At first, about ten forecast markets were created. Each of these markets embodied a certain quantity of sales, say 0-1500 units, 1501-1600 units and likewise.
• Later, each sales executive was allotted 20 shares in each of these markets, which could be bought and sold every month
• This process went on for a stipulated time period. At the end of the period, the actual sales were noted. The executive whose actual sales for the period, matched with the estimated sales figures, was paid a dollar per share. For instance, if an executive holds 10 shares in 2000 to2100 market and actual sales are 2050 units, he would earn USD 10
The idea proved to be useful as it scored over the companys conventional forecasting methods in 15 out of 16 parameters.
Popular everywhere:
The idea market concept was successful in various other segments too. For instance, idea market predictions on presidential elections in the US were more accurate than the conventional poll-forecasting tools. An academic project titled Iowa Electronic Markets would predict the outcome of US presidential elections 3 out of 4 times better than the regular pollsters.
Not just this, idea markets would predict Oscar winners more precisely than others. The Hollywood Stock Exchange, a web-based virtual market that predicts the outcome of Hollywood movies, could precisely guess 35 of 40 Oscar nominations in the main categories last year.
Whats more, the success of idea markets has enthused companies to adopt the same. Newsfutures.com is one company that runs idea markets for the entire pharmaceutical industry. The ideas traded on this site span across a range of topics from legislation to new products. The success of the idea market concept at HP and elsewhere has shown the corporate world, as to how an internally built idea markets would help in making accurate market predictions.
The challenges ahead:
The HPs experiment with the concept, revealed how idea markets could help resolve long-standing administration problems. Likewise, at British Petroleum (BP), the idea markets concept was used to improve managerial decision-making. BP wanted to reduce its greenhouse emissions by 10 percent by 2010 when compared to its 1990 levels. However, the challenge here was to find the cheapest way to do so. The company, therefore, approached an Internet-based electronic market to devise low-cost methods to reduce emissions.
To achieve this, each business unit was given a particular emission reduction target along with an option to either reduce emissions directly or purchase technology to do so from other business units at a lower cost. With this experiment, BP could not only achieve the optimum use of its corporate resources, but could also ascertain the real cost of reducing emissions.
Understanding consumer behaviour:
Idea markets can also be used effectively in understanding consumer behavioural patterns. For instance, when a new product is launched, companies are not too sure of customer acceptance. Idea markets can precisely serve this need. Ely Dahan at UCLAs Anderson School of Business in association with others has been working on developing markets to suit such business needs. The group proposes an idea market wherein consumers buy and sell stocks representing commodities.
For example, suppose a car company is set to launch a new model in the market after two years. Such a model would have to compete with various other existing and new models. All these models would constitute a stock. The consumers are given resources to deal in the stocks along with details regarding each model and its projected sales. The final stock prices seen at the close of the trading period convey the best estimates regarding consumer preferences for each of these models. The idea market analysis of consumer preferences is thus found to be better than that of other conventional methods.
Low cost initiative:
Conventional forecast techniques like focus groups or consumer surveys require participants to answer certain questions. They also require hundreds of participants. But idea markets can function with as few as 20 to 30 participants. The companies could therefore employ this tool more efficiently in understanding consumer preferences and employee beliefs at a much lower cost.
Also, in a dynamic market environment, the participants often change their actions in line with fluctuating prices and trading actions of their counterparts. This is one critical aspect that conventional methods overlook.
And the future:
Today the idea markets concept is perceived to be a useful business tool. In future, it is expected to make a foray into assessing uncertain investments in research and development, new technology projects, patents and other intangible assets. As Robin Hanson, an economist at George Mason University, rightly puts it, The market technology has enormous potential to help us address the most important questions we think about, the idea markets concept definitely has a strong future.
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