From: Brian Atkins (brian@posthuman.com)
Date: Sun Jan 27 2002 - 10:51:02 MST
Robin Hanson mentioned
-------- Original Message --------
Subject: To Learn What People Want, Trade 'Idea Stocks'
Date: Sun, 27 Jan 2002 09:47:03 -0500
From: "R. A. Hettinga" <rah@shipwright.com>
To: Digital Bearer Settlement List <dbs@philodox.com>
http://www.nytimes.com/2002/01/27/business/yourmoney/27TRAD.html?pagewanted=print
January 27, 2002
To Learn What People Want, Trade 'Idea Stocks'
By BARNABY J. FEDER
SOUTH POMFRET, Vt. -- BUSINESS students from the Massachusetts Institute of
Technology, participating in a mock stock exchange at a vacation lodge
here, received instant feedback from the wireless network that linked them.
As the 30 or so traders pecked away tensely on their laptop computers,
sighs and nervous giggles signaled the gyrating value of their portfolios.
Except for its unusually informal setting, this recent exercise looked like
the kind of simulated trading of stocks or bonds that is routine in the
finance curriculum at many business schools.
But this was a marketing class conducted by Ely Dahan, a professor at
M.I.T.'s Sloan School of Business. The students were not trading securities
but the traits of various goods and services, like automobiles and ski
resorts. The exercise was part of an effort by Professor Dahan and
colleagues at M.I.T. to prove that simulated trading could answer that most
basic of all product development questions: What do consumers want?
One session here traded "stocks" representing the Pontiac Aztek, Acura MDX
and other rivals in the new market segment that melds sport utility
vehicles, minivans and cars. The students also traded the characteristics
of ski resorts - whether skiers could drive to the resort or had to fly to
it, for example, and whether it had crowded slopes. Other sessions focused
on designs for laptop-computer carrying cases and variations on hand-held
digital assistants.
In as little as 20 minutes, the students arrived at fairly stable rankings
of the relative worth of what they were trading. More intriguingly, as was
driven home by interviews with skiers nearby at Mount Killington, the
relative values arrived at through the trading closely paralleled consumer
preferences divined much more laboriously through traditional field
research.
"It's amazing that you can get effective results in areas where people
don't know that much," said Jay Livens, an M.I.T. student, after Professor
Dahan showed the outcomes of their vehicle trading.
The closing prices were generally consistent both with consumer sentiments
culled from more traditional market research and with previous trading
experiments conducted at M.I.T. In just minutes, for example, the trading
showed disappointment with the Aztek and enthusiasm for the MDX in
proportions similar to those of car buyers over the last year. "General
Motors (news/quote) might have been able to save itself a lot of pain if it
had run trading like this a couple of years ago," Professor Dahan said.
To participants, market research had never seemed so much fun - or cool.
"I feel like we are at the genesis of a potentially great idea," said
Kristina Larson, a first-year student.
N real markets, the value that buyers place on goods - reflected in prices
- is established as a byproduct of the exchange of goods. In Professor
Dahan's markets, buyers' opinions are the whole point of the exercise. If
the operations of regular markets are like fishing for food, then Professor
Dahan is fishing to collect data from the fish about pollution levels in
the ocean.
Professor Dahan's research was inspired by the earlier successes of several
Internet- based trading exchanges that have been called "decision markets"
by Robin Hanson, an economics professor at George Mason University. The
most renowned one, the Iowa Electronic Markets, has often outperformed
pollsters in predicting election results. The market, operated by the Henry
B. Tippie College of Business at the University of Iowa, permits investors
to buy and sell shares in a candidate, based either on how much of the vote
they expect the candidate to receive or simply on whether the candidate
will win or lose. Under a special clearance from the Securities and
Exchange Commission, the market accepts investments of up to $500, giving
participants an incentive to invest seriously without running afoul of laws
that ban gambling.
Another virtual market, the Hollywood Stock Exchange (www.hsx.com), has
become one of the movie industry's most trusted predictors of how new films
will perform at the box office. The exchange has more than 850,000
registered members. After completing the free registration form, traders
get two million "Hollywood dollars." They base their "investments" on how
they expect a film to perform in its first four weeks at the box office,
months before the film even opens. Each Hollywood dollar equals $1 million
of film revenue. If a film is trading based on expectations that it will
gross $80 million in its first four weeks, investors who think it will
reach $100 million buy shares. Those who anticipate weaker results sell.
The Hollywood Stock Exchange, owned by a British subsidiary of Cantor
Fitzgerald, the Wall Street firm, sells data about the trading to
entertainment companies.
Several companies have experimented internally with similar trading
programs. The most successful reported experiment, Professor Hanson said,
was at Hewlett-Packard (news/quote). Predictions of Unix workstation sales,
derived from trading shares in different projections by Hewlett-Packard
sales managers, repeatedly proved more accurate than official estimates by
the unit's marketing group. The trading apparently filtered out the
tendency of sales executives to be optimistic in their projections to
superiors.
Professor Dahan is trying to forecast the appeal of competing packages of
product features, some of which may never exist other than as ideas. Such
trading cannot be measured against a real outcome, as in an election. But
the trading of product attributes may help a business pick the most popular
combinations of features early in the design process.
Trading contests may also help a company find consumers who are especially
knowledgeable about its business - or one in which the company wants to
expand. Such consumers, called lead users, are prized in the product
development world.
Professor Dahan's main goal is to permit product developers to do research
that is fast, easily modified and ultimately much more thorough. The
technique now viewed as the best, a polling practice called conjoint
analysis, was developed in the late 1960's. Marriott used it to design its
Courtyard by Marriott chain (the slogan: designed by business travelers for
business travelers).
But conjoint analysis for more than a few attributes is unwieldy because
the possible combinations quickly mushroom to unmanageable numbers. That is
a big shortcoming in a world where many products have more than 100
distinguishable features that might influence consumers, Professor Dahan
said.
In theory, trading can establish simultaneous values for scores or even
hundreds of product attributes - just as it does each day for thousands of
publicly listed stocks. That assumes that large groups of people are
willing to trade for fun or for modest rewards.
But Professor Dahan, 44, is a cautious champion. He began investigating
stock trading at the suggestion of another M.I.T. professor, Andrew Lo, a
finance expert, as part of Professor Dahan's work on M.I.T.'s Virtual
Customer Initiative. That research seeks ways to use the Internet and other
tools to speed product development. "Andrew has far more confidence in the
accuracy of markets than I do," he said.
"I think businesses will be trading these stocks like crazy in the future,
but this is just a complement to other techniques," Professor Dahan added.
"It would be heresy among marketing academics to say we no longer need to
measure individual preferences. Trading doesn't reflect them."
PROFESSOR DAHAN said research suggested that in 38 percent of the trades,
sellers like the specific products or features more than the buyer.
Presumably, the sellers unload the stock because they think the price will
fall.
But how often game traders will behave as normal financial investors is one
of many areas about which little is known. Other questions include what
rewards are needed to keep enough traders playing and how to determine
winners.
Professor Hanson says he thinks the biggest hurdles to the spread of
research- driven trading in business may be cultural. Companies
continuously make investments based on assumptions about the future that
are, in essence, bets. But stock trading is so obviously speculative that
many of them may be reluctant to be seen using a form of it as a data
source for important decisions.
-- ----------------- R. A. Hettinga <mailto: rah@ibuc.com> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'
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