Don Thompson is an economist and professor of marketing at the Schulich School of Business at York University in Toronto. He has taught at Harvard Business School and the London School of Economics. He is author of nine books, including The $12 Million Stuffed Shark: The Curious Economics of Contemporary Art, which details his explorations in trying to understand the high end of the contemporary art market. Shark has been published in thirteen languages. His most recent book, Oracles: How Prediction Markets Turn Employees into Visionaries, was published by Harvard Business Review Press (June, 2012).
* * *
Morris: Before discussing Oracles a few general questions. First, who has had the greatest influence on your personal growth? How so?
Thompson: A dozen brilliant people I encountered in grad school (at Berkeley) and later, in universities, businesses and government. From each I learned new things, but more important, new ways of looking at problems, and how to think outside the box.
Morris: To what extent has your formal education been invaluable to what you have accomplished in life thus far?
Thompson: My formal education included an MBA, which got me interested in problem solving, and a PhD, which furthered that interest but is also provided an essential entry point to an academic career. So the formal education part has been invaluable for my career path.
Morris: What do you know now about the business world that you wish you knew when you when to work full-time for the first time?
Thompson: The importance of the soft skills involved in communication, motivation and managing.
Morris: Of all the films that you have seen, which – in your opinion – best dramatizes important business principles?
Thompson: Citizen Kane. The explanation is in the eyes and mind of the viewer.
Morris: From which non-business book have you learned the most valuable lessons about business?
Thompson: I’ll suggest two: Michael Mauboussin’s More Than You Know: Finding Financial Wisdom in Unconventional Places (Columbia Business School Press 2008), and Cass Sunstein’s Going to Extremes: How Like Minds Unite and Divide (Oxford University Press, 2008). The Mauboussin book is about business, but more centrally, about making rational decisions. The Sunstein book is about how wrongheadedness gets worse when people get together in groups. Both are brilliant thinkers, I recommend anything with those names attached.
Morris: Here are several of my favorite quotations to which I ask you to respond. First, from Lao-Tzu’s Tao Te Ching:
“Learn from the people
Plan with the people
Begin with what they have
Build on what they know.”
Thompson: Right. None of us is as smart as all of us (which is also a Japanese proverb).
Morris: Next, from Voltaire: “Cherish those who seek the truth but beware of those who find it.”
Thompson: The prediction market equivalent is probably, “If you really are afraid of the answer, don’t ask the question.”
Morris: And then, from Oscar Wilde: “Be yourself. Everyone else is taken.”
Thompson: It never occurred to me that there was another option. Probably too late now.
Morris: Finally, from Peter Drucker: “There is surely nothing quite so useless as doing with great efficiency what should not be done at all.”
Thompson: That is a great quote. I once was presented with its equivalent, by a Columbia marketing professor named Al Oxenfeldt, with whom I had co-authored a couple of articles and was proposing a new topic, which I had collected a lot of data on. Al said, “If something is not worth doing, it is not worth doing well.” Quite right.
Morris: In Tom Davenport’s latest book, Judgment Calls, he and co-author Brooke Manville offer “an antidote for the Great Man theory of decision making and organizational performance”: organizational judgment. That is, “the collective capacity to make good calls and wise moves when the need for them exceeds the scope of any single leader’s direct control.” What do you think?
Thompson: That is exactly the philosophy of Jim Lavoie and Joe Marino, co-CEOs of my favorite prediction-market company, Rite-Solutions – which is the subject of the first chapter of Oracles.
Morris: Now please shift your attention to Oracles. When and why did you decide to write it?
Thompson: My interest goes back a few years, but expanded during a recent three-year stay in Turkey, working with business executives and with a group from the Turkish government. The business people asked, “How do we do marketing research in Turkey when we have a “derivative” economy; so many customers just look to buy what they think will be fashionable next year in Italy. The Turkish government struggled with the details of a peace initiative for the divided sections of Cyprus that would implement the conditions of the Annan Plan, recommended in 2004 by Kofi Annan, then secretary general of the United Nations. Prediction markets could be used to try and find answers to both questions – and if they could be used for purposes that diverse, there had to be a lot of other possible uses. (We also ran a prediction market on the winner of a camel-wrestling competition).
Morris: Were there any head-snapping revelations while writing it? Please explain.
Thompson: One revelation was the number of Fortune 100 companies that were using internal predication markets, but never mentioned them in 10Ks, annual reports or in business press interviews: Google, Yahoo, Lilly, Motorola, Microsoft, Intel, Siemens, Pfizer, Best Buy, Corning, and Bank of America among them. There are other companies that let me examine their markets, on the understanding I would not mention them by name.
Morris: To what extent (if any) does the book in final form differ significantly from what you originally envisioned?
Thompson: My books just evolve as I write. There are always new examples and new insights. The final outline is never clear until 95% of the way through the project.
Morris: For those who have not as yet read Oracles, what are the defining characteristics and primary functions of a prediction market?
Thompson: The underlying problem is that businesses and governments must predict what will happen tomorrow, next week, or next month. They do this through the mechanism of a brilliant CEO, or meetings, or surveys, or the use of experts. Prediction markets are in many cases better than any of these.
A prediction market is a form of stock exchange, run either internally to an organization, or in the case of some public markets, on the Internet. A regular stock exchange incorporates buy-sell opinions from thousands of individuals, and hundreds of mutual fund managers each day. The exchange predicts the value of a company at a point of time – thus the value of a share. We accept that as the best estimate of what a share is worth.
A prediction market is a stock exchange that deals with events or outcomes rather than securities. Large, diverse sets of people take part. The price of an “outcome,” say Obama winning the presidential election, tells us the probability of that happening (at the time of writing, about 53% on public prediction markets).
Typical applications within a company are sales forecasting, predicting whether a new product or project will launch on time, predicting prices, what new products will be successful, or what new technologies should be pursued.
A prediction market brings together a diverse set of people, a makeshift stock market, and the wisdom in crowds, and aggregates them for predictions or decisions. Investors in the market put their money where their beliefs are.
Morris: As I read your book, it occurred to me that Steve Jobs was a one-man prediction market.
Thompson: You can’t have a one-man market. One-man means top-down leadership.
Morris: These comments by Jim Lavoie, CEO of Rite-Solutions, caught my eye. He notes that the market was designed “to take the employee relationship beyond the transaction level – I pay you, you do a job – to an emotional level where people are entrusted with the future direction of the company, asked for their opinion, listened to, recognized for their interest in the company’s future, and rewarded for successful ideas.”
Thompson: That, perhaps more than the results of the market, is the great benefit of Rite-Solutions prediction market. Lavoie is a brilliant manager.
Morris: Why is it that prediction markets – and all predictions – have to be wrong sometimes in order to be accurate”?
Thompson: If an event has a 90% probability of happening, it will not happen one time in ten. If the weatherman predicts a 90% chance of rain, it will rain on 90% of the days where the prediction is “90%”, but not every time that prediction is made. If it rained every time, it would mean that the weatherman is NOT a good predictor.
Morris: Why is it highly unlikely, as you indicate, that there will be a film version of Oracles? What “fundamental business truth” does that suggest?
Thompson: No fundamental truth, it just means that most movies about economics or business are seen by the movie-going public as not worth attending. Freakonmics: The Movie!, made from a wildly best-selling economics book, was released in October 2010 with few screens, unenthusiastic reviews, and a very brief run.
Morris: As we slouch and lurch through another political campaign year, what do you think has been and/or will be the role of election markets? So what?
Thompson: I say in the book that one of the safest predictions I can offer is that a decade from now, survey-polling as we know, and in particular political polling, will have been substantially replaced by prediction markets.
Morris: What is “cognitive diversity” and why can it be significant?
Thompson: For a market to work, participants must bring cognitive diversity. This includes diversity in experience, background and education. It differs from social diversity, which includes gender, age, race and religion. The insight: don’t make decisions based only on a meeting room full of 30-35 year old males with private school backgrounds and MBAs from Ivy League schools.
Morris: Here’s the head note for Chapter 7: “Creativity is no longer about which companies have the most visionary executives, but who has the most compelling ‘architecture of participation’; which companies make it easy, interesting, and rewarding for a wide range of contributors to offer ideas, solve problems, and improve products.” – Tim O’Reilly, CEO, O’Reilly Media, referring to Google (Page 83)
Thompson: “Innovation that happens from the top down is orderly and dumb. Innovation that happens from the bottom up tends to be chaotic but smart.” (That is a quote from Curtis Carlson, CEO of SRI International that I cite in the book).
Morris: You provide a series of brief, brilliant analyses of several truly remarkable companies. Please explain what the single most valuable business lesson is that can be learned from each. First, Google
Morris: Also, Misys
Thompson: A market can succeed in a company with a traditional hierarchical structure, or where top management offers only token support, if there is a dedicated prediction market proponent driving the process.
Morris: What are the defining characteristics of a “way-outside-the-box” market?
Thompson: “Way outside the box” is best illustrated with examples. One is the US government using prediction markets to predict terrorist activity or assassination probability. Or health officials using cell phone data to track where infected people travel, to predict where outbreaks of tuberculosis or HIV outbreaks might take place. Or using a market to cast the lead role in a major musical in London’s West End.
Morris: According to George Mason University professor, Robin Hanson, “Decision markets will one day revolutionize governance, both public and private.” Do you agree? Please explain.
Thompson: Hanson’s idea is less likely to happen with public governance. His public governance idea is that elected representatives decide what issues should be part of national policy, and national prediction markets decide how to achieve these goals. For example, officials decide whether private ownership of handguns is a problem, a market decides what to do about it. There are real questions as to whether a legislature would ever cede this power – and whether wealthy lobbyists would subvert the decision market.
Morris: What are the major barriers to making markets work?
Thompson: A CEO who has to be the smartest person in the room; middle management that fears having their control over information undermined.
Morris: How best to avoid or overcome those barriers?
Thompson: Reading Oracles, and being persuaded by the success stories.
Morris: You briefly discuss the Bernard Madoff returns in Chapter 17, then pose the question: “Would any financial group have run [a properly structured market], against its own interests?
Thompson: A prediction market would certainly have raised warning signals about Madoff, given the right questions and informed investors. Many people in the financial sector knew that a 20% return each year, every year, was not possible. But would anyone who was reassured by SEC reports and the participation in Madoff’s business dealings by large, reputable banks have run such a market?
Morris: Long ago, I realized that no organization ever has too many effective leaders at all levels and in all areas of its operations. You seem to think the same can be said of “oracles.” Is that a fair assessment?
Thompson: That was Jack Welch’s conclusion for his whole tenure as CEO of GE – and that company has been as successful in management development as any in the world. It is true of managers, and true of oracles.
Morris: I am curious to know why you decided to conclude the book by recalling a situation in the film, Jurassic Park.
Thompson: What better example of the risk of ignoring group wisdom than that of a paleontologist, described by Michael Crichton as believing that T-Rex had such bad eyesight that it would respond only to rapid movement. The great majority of his colleagues believed that T-Rex was warm-blooded, had great eyesight and quick reflexes. The paleontologist in the book ignores this group wisdom, and later finds himself alone in an enclosure with a T-Rex. He stands perfectly still. The T-Rex eats him.
Morris: He was obviously misinformed. Let’s say that a CEO has read and then (hopefully) re-read Oracles and is eager to transform his company’s culture into one within which oracles thrive. Where to begin?
Thompson: There is in Oracles an appendix detailing ten steps to getting a market started, and another appendix on commercial suppliers of software who can help. The CEO will discover both these on the second reading.
Morris: For more than 25 years, it has been my great pleasure as well as privilege to work closely with the owner/CEOs of hundreds of small companies, those with $20-million or less in annual sales. In your opinion, of all the material you provide in Oracles, which do you think will be of greatest value to leaders in small companies?
Thompson: Chapter One tells the owner/CEO about the great success of a prediction market. Read Chapter One on how Rite-Solutions uses markets. Then steal the ideas (you can even purchase the software they use).
* * *
Don cordially invites you to check out the resources at these websites:
Don’s faculty page, please click here.
Amazon’s Oracles page, please click here.
Amazon’s The $12 Million Stuffed Shark page, please click here.