Markets better than hierarchy?

I found this article to be pretty fascinating.

From CNN Money:

Jawing about tomorrow’s weather for an hour might sound more intriguing. But at HP, 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 isn’t about government so much, but the principle is the same: a free market of people making personal decisions based on their own knowledge and desires is a far better allocator of resources than a hierarchical decision-making structure, be it a government planning bureau or a corporate management structure.

And, like their fellows in government, the hierarchs in the business world are apparently jealous of their unnecessary power:

With blue-chip goliaths showing people how to mobilize brainpower, you’d think more would be racing to push ahead. Problem is, the better the markets get at performing business tasks, the more they make managers look expendable.

“If you have a culture in which vice presidents have been making the decisions for decades,” says Thomas Malone, a professor at MIT’s Sloan School of Business, “the very idea that you would let just anybody participate threatens a lot of people.”

Naturally though, I feel that the free market in business will correct this lack of a desire for a free market in decision-making. If you as a corporation can allocate resources better, then you can manufacture a better, cheaper product. If you can do it while skipping the padded salaries of management, then that’s even more true. The hierarchs of the economy will find themselves out of jobs one day. They can slow down this inevitability, but they will never stop it, so long as the free market remains free.

3 Comments
  1. When did the free market ever get free?

    You should read the book, THE WISDOM OF CROWDS. It’s funny that some ideas that are seemingly collectivist are actually the most libertarian.

  2. Very cool. It is true: when money is on the line, suddenly the ability to predict becomes much more accurate.

    The other thing that popped into my mind is: Why are there no futures on DRAM? It seems that there would certainly be hedgers: Dell, HP, Gateway, Lenovo, etc. The price fluctuates, there is volatility risk. Fungability would have to be provided for in some way with the type and capacity of DRAM, I suppose.