We're all familiar with the power of open markets when it comes to establishing the present or future value of goods and services. The wisdom of the market is the breadth of human knowledge and insight that collectively delivers an average price for something. While value will always be under or overestimated to some degree, it is our own individual-versus-the-collective thinking that leads us to decide whether a given investment is a good or bad idea.
What if businesses decided to take a closed-market approach to their own products, program initiatives and strategies? The idea of creating an internal futures market was posed to me recently by one of my favorite risk analyst friends, Bob Charette of ITABHI Corp., and it's really a simple concept. The idea is to create a futures, or "prediction market," and ask particular questions that tap the collective wisdom of key participants in an organization - maybe even extend the polling to clients or partners. The goal would be to give executive decision-makers insight they would not otherwise have.
"We all can pretend that internal reviews of projects are honest and forthright but we all know from experience that they're not," Charette says. "Things are spun more optimistically the farther they move up the organization." One way of trying to get better information about what's happening on the ground is to see whether multiple participants would bet for or against a particular idea or approach. Charette has seen several examples of these kinds of markets (for Yahoo's take, Google the word "Yootles"), and he'll present an online exclusive column on the topic in the March issue of BI Review.
Most of the examples Charette has come across are closed markets as opposed to open ones, which doesn't diminish their function. In any case, you need to remember that somebody is betting the market will go up and somebody else is betting the opposite; what you're looking for is a preponderance of evidence. "It's almost like a referendum on your probability of success," says Charette. "For instance, I've always thought defense projects are a perfect example where the internal market would be useful; you have a situation where people are always optimistic in terms of budgeting and predictions where the environment isn't necessarily transparent, open and honest."
Public or private sector, it's pretty easy to quickly come up with a reason or two why an internal futures market would not work. People wouldn't want to see themselves as opposed to an idea they are already assigned to. Others would fear the market would be used as a weeding process to eliminate naysayers and institutional diehards. For that reason, internal futures markets tend to be anonymous, and they can be weighted to regard certain opinions more highly without revealing their identity.
"There is some argument whether you can take this to internal projects and have people vote against or for themselves," says Charette. "Then you look at examples like BP and that Texas oil fire. It's pretty clear when you read the Baker report that people did know there were tremendous safety issues and not only in Texas. You'd need to phrase it in a way to avoid too much legal risk, but an internal market could ask something like, 'Do you believe there will be a major safety event in the next six months?' You might have gotten an indication that people were seeing things a lot worse than they were pretending." Instead, at BP things got out of hand because of a culture of cost cutting had been playing on the margins of safety.
You might think these kinds of tasks are what focus groups and market surveys are made for. Focus groups aren't built for internal projects however, and more importantly, the goal of an internal futures market is to get hold of the people who have incentives or other reasons to get things right. "If you're dealing with a focus group, somebody can like a product, but you don't always know if they'd pay for it. It's put your money where your mouth is." There are other vested ideas like Toyota's use of a sophisticated suggestion box as a way to get to the right audience. "If you want to know about your competitors' bumpers, you ask your bumper people. They're interested in bumpers like no one else. The people on the line are often the ones to talk to, not the engineers or marketing guys."
In the real world, risk experts like Charette find that a central weakness in assessments is that they tend to be too narrowly focused and don't take into account a variety of external forces that really come into play, which is what a market does. It's the things you don't worry about that tend to get you into trouble. As Agent 86, Maxwell Smart would have said while holding up a thumb and forefinger, "Missed it by THAT much." Markets may not be infallible, but they do tend to point you to better questions.
Getting people to play the game properly is key, and no, internal futures markets are not the be-all or end-all, just another idea organizations can use to make use of information that's readily available. In a sense, data mining is taking a similar approach by combining experts with markets to come up with better insight according to Charette. "I can't tell yet whether this is significantly better or just better than focus groups. But if you're trying to make group decisions in complex situations with a lot of information, this may be a step to understanding how to deal with the sheer volume."
Look for Bob's column at BIReview.com on March 1 and send your comments to me at firstname.lastname@example.org.
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