All seeing all knowing
Futures markets can help identify successful products, predict revenues, and even forecast whether Bush or Kerry will win in November
Oddsmakers. Here's how the extraction process works at HP: The first week of every month, a group of managers is asked to place bets on a revenue forecast. HP takes the official revenue estimate and then comes up with 10 alternative possibilities, five higher and five lower than the official projection. Each possibility is represented by a bin on a computer screen. Managers then place 100 tickets into the bins, with the most tickets being placed in the revenue bins they think are most likely. The ratio of tickets to bins gives each manager's probability forecast, and then all those forecasts are aggregated. The manager who is closest gets a $75 check. "This is big," Huberman says. "Uncertainty is bad, and as we have shown, the knowledge that the members of an organization have can be used to predict certain future outcomes more accurately."
Even though some companies are dabbling with these markets internally, there might also be value in letting the public in on the action, as with the Iowa political markets. Direct-marketing firm Wunderman is trying to persuade its clients to set up prediction markets as a way of creating a useful online community around their products. "You love to have passionate customers like with Harley-Davidson or with iPod owners, and you want to be able to dialogue with them and access all the info that these communities generate," says Len Ellis, an executive vice president at the firm. A company could create a market not only about sales or earnings but also about whether new products or features will succeed.
A company that NewsFutures is working with is Japanese advertising behemoth Dentsu. Koichi Yamamoto, a senior manager there, thinks prediction markets will help improve forecasts of advertising demand and consumer trends. "The key value we see is that prediction markets have the potential to extract the best essence from group knowledge, as an alternative to majority decisions," Yamamoto says.
So might all this mean the end of corporate management as we know it in favor of a business world where prediction markets and not the suits will make the big calls? Bingham has his doubts. "We are not ready to get rid of our drug portfolio managers just yet," he says. Yet Malone thinks prediction markets will become a common tool for corporate America and symbolize a coming change in management style. "We are in the early stages of an increase in human freedom in business that may, in the long run, be as important a change for businesses as the change to democracy was for governments," he says. "Prediction markets are only part of this overall trend. It won't mean the end of management, but management will no longer be about command and control."
Presidential futures market
[Complete chart data are not available.]
Bush $0.499
Kerry $0.506
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Aug. 1
Aug. 5
Aug. 10
Aug. 15
0.46
0.48
0.50
0.52
Source: Iowa Electronic Markets
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