The future is a gamble


Face to face meetings aren't usually the best way to tap expertise
Businesses are leaning to harness the expertise of markets.

On the first Tuesday of every month, 10 or so commodity managers from across Hewlett-Packard's hardware divisions dial in for a conference call - but the civility often ends there. For an hour or more, they bicker, squabble, and joust over one seemingly innocuous question: What will the price of DRAM memory chips be in one month, three months, or six? "Usually, it's the loudest, most obnoxious guy who gets heard," says HP research scientist Leslie Fine, who's studied the process.

Jawing about tomorrow's weather for an hour might sound more intriguing. But at HP (Charts), the DRAM powwows often turn into shouting matches for a simple reason: After each meeting the managers vote and then put out an official forecast that 70 HP buyers rely on to price more than $50 billion in HP computers and other hardware-often months before the chips that go in them are bought. If the forecasts miss by even a few cents, the difference, which can add up to millions of dollars, comes out of HP's slim profit margin for hardware.

Bernardo Huberman, a senior fellow at HP Labs, believes there's a smarter way to make predictions that affect a company's bottom line - and he and Fine have made guinea pigs of the DRAM squad to prove his point.

These days, after each meeting, the 10 managers and 10 other colleagues from around the world log on to an internal website and enter bets on chip prices. Each "player" gets 100 tickets to place bets on different price ranges. At the end of the quarter, the winning player gets up to $250.
Huberman's experiment is just a few months old, but already his betting market for DRAM prices is batting .750 against the status quo. So far it's beaten the official HP forecast six out of eight times, and tied on the other two.

Removed from the closed-door setting of executive meetings, where personality and ego can skew honest opinion, the new forecasting tool "works better than the best person," Huberman says.
More important, it's lending credence to the notion that online betting and similar types of so-called prediction markets aren't just for Wall Street and Las Vegas. They're evolving into a potentially powerful management tool for making calls on everything from new hit products to next quarter's sales numbers.

This shouldn't be a big surprise. The new approach is that it's being done inside companies.

I can't seem to find the reference now, but I seem to remember something on Presidential elections and the surprising results.

— NeoWayland

Posted: Thu - September 14, 2006 at 12:25 PM  Tag


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