Decision markets

I've made some posts on James Surowiecki's financial column in the New Yorker before. Now, I found a short piece of his (related to his new book 'The Wisdom of Crowds') in Wired.

He describes the uncanny knack of large crowds getting things right more often than experts. Markets, in particular, seem to be good at forecasting where experts fail. According to the Publishers Weekly review, the book outlines 4 necessary criteria for large crowds to be 'smart.'

(1) diversity of opinion
(2) independence of members from one another
(3) decentralization
(4) a good method for aggregating opinions

Strangely, (financial) incentive isn't listed, even though Surowiecki has argued it's relevance before, during the Political Analysis Market scandal.

In Wired, Surowiecki describes some companies' experiments with internal decision markets and their encouraging results.

Firms need to aggregate the collective wisdom [...]

One intriguing method of doing this is to set up internal decision markets, which firms can use to produce forecasts of the future and evaluations of potential corporate strategies. Few companies have tried such markets. But the few examples we have suggest that they could be very useful. In the late 1990s, for instance, Hewlett-Packard experimented with artificial markets to forecast sales. Only 20 to 30 percent of employees participated, and each market ran for just a week, with people trading at lunch and in the evening. The market's results outperformed the company 75 percent of the time. Even more impressive was a recent experiment at e.Lilly, a division of Eli Lilly, which set up a market to test whether it was possible to distinguish between drug candidates likely to be approved by the FDA and those likely to be rejected. Realistic profiles and experimental data for six hypothetical drugs were devised by e.Lilly, three of which it knew would be approved and three rejected. When trading opened, the market - made up of a diverse mix of employees - quickly identified the winners, sending their prices soaring, while the losers' prices sank.

The evidence is clear: groups - whether top executives evaluating a potential acquisition or sales reps and engineers analyzing a new product - will consistently make better decisions than an individual. Companies have spent too long coddling the special few. It's time for them to start figuring out how they're going to tap the wisdom of the many.

I'm not so sure that groups are always better. For one thing, the market mechanism probably wouldn't work for fuzzy questions or where there are not yet clearly defined alternative solutions. Nevertheless, it's an interesting tool. And, given the difficulty of reaching decisions in large groups or decision-making online, it certainly deserves more attention.

HBS discussion on gurus

I have long been fascinated by management fads - not the fads themselves as much as the way otherwise intelligent people gobble them up as superior wisdom. Not that management gurus are quacks, but their gift lies more in recognizing successful ideas and explaining them convincingly than in revolutionizing the way business is done at a fundamental level. Often the fads are expressions of a relatively straightforward business principle that someone has managed to standardize and in the best case implement in a surprising and successful way.

So, I was intrigued to see the HBS discussion board on management gurus. The post that best sums up the phenomenon for me is one that describes the gurus as propagators of successful management innovation. If consultants play an important role in accelerating adoption of new technologies, it seems logical that they would do the same (or more) for process innovations.

Outstanding companies create the concepts that are then formalized and spread by gurus. Outstanding companies exist in all cultures and continents. But gurus, as you pointed out, are mainly U.S.-based. [...]

U.S. economic strength is partly explained by the coexistence of both outstanding companies and a social mechanism which help the rest of the pack to close the gap (gurus/ consultants). In short, following gurus is less a way to create a competitive advantage than a way to avoid creating a competitive disadvantage in one specific area.

Of course, a company is never outstanding in all regards (otherwise the company has made no strategic choice) and can always use guru advice in one area or outsource the activity. Finally, one might consider that "closing the gap" is as strategic an activity as "innovating ahead of the pack" because a system is as strong as its weakest element.

Useful

HBS Working Knowledge has posted the link to the WTO's International Trade Statistics 2003 (pdf, 232 pages).

Visualizing information

When I first started this blog, I posted a link to textarc, a project that visually maps texts. In a similar vein, Marcos Weskamp maps out aspects of the internet: Google news, packet transmission (see the recorded session), electronic conversations, etc.

The balance between art, fun and information is probably different for each viewer. In my opinion it's well worth seeing, if only for the proof that information can be displayed in graphically appealing ways, not just the horrible and confusing graphs spewed out by most network analysis software.

For a historical perspective, see Charles Joseph Minard's map depicting the losses suffered by Napoleon's army in the Russian campaign of 1812 - reputedly the best statistical graph ever drawn...

More by Minard here.

Thanks to Karina.

Import workers or export jobs?

The Shell Economist essay competition this year asks:

Import workers or export jobs? Should developing nations be allowed to 'poach' skilled professional labour from countries who have helped pay for this expertise? Or is the influx of immigrants, whether skilled or unskilled, a positive force, bringing either expertise or ambition and hard work to the host nation?

Submissions are due August 20th, midnight (GMT).