Dr. Amit Mehra Assistant Professor of Information Systems Indian School of Business Hyderabad, INDIA Ph: Being a technology consultant to the CEO

What are the functions of the IT organization today?

PART I: Getting PART 1 Driving innovation through better information using IT

5 Getting better information using IT Our focus

6 From the Cathedral to the Bazaar Should decision making persist in the ivory tower?

7 Learning Objectives Can Web 2.0 principles, in the form of prediction markets, help improve corporate decision making? What are prediction markets? How do they work? Why do they work? How to design them?

8 Introduction What are prediction markets?

9 Examples of Prediction Markets Iowa Electronic Markets ( To predict elections outcomes since 1980s Participants traded own money Accounts with $5 to $500 Turnover is in tens of thousands of dollars Newsfutures ( Political, current events etc. Tech and Pharma futures for clients Virtual currency redeemable for monthly prizes

10 Examples of Prediction Markets Hollywood Stock Exchange ( Success of movies, movie stars Awards like Oscars – 80% correctly Completely Virtual Currency The fun element is enough for people to participate People participate correctly i.e. their judgments seem to be based on information and not personal opinion Iowa Electronic Health markets Infectious disease contagion How many new female cases of primary and secondary syphilis will be reported in the U.S. during quarter 3 of 2009 (week 27, starting Jul 5, through week 39, ending Oct 3)?

11 How can prediction markets be used in business?   An example (Bestbuy):

12 Why do they work? Estimating a state Scott Page’s diversity prediction theorem Collective error = average individual error – prediction diversity

13 DESIGN ISSUES AND BEST PRACTICES

14 Design of prediction markets? Design a Contract Question or set of questions based on future events Provide incentives in the contract Soft v. hard incentives?

15 Issues with Corporate Prediction Markets What if the participation is less? Even thin participation (100 people) have been found to be remarkably accurate HP and Siemens ran markets with people Monetary incentives may be needed if participants are busy and/ or don’t see much fun value 30% of Google’s markets are fun markets Volumes in fun markets and serious markets are found correlated Create liquidity for serious markets rather than drive it out What if few people have relevant knowledge? That’s fine, few people with enough liquidity may be able to move the market enough to signal to others

16 Known Issues with Corporate Prediction Markets An overestimate bias for favoritesAn underestimate bias for long-shots Bad in predicting small probability events Market manipulation E.g. artificially increase price by buying When others start to buy, you sell and book profits Not bad, since its creates interest to participate repeatedly Google bots in GPM Naïve traders?Insider trading?

17 Summary -- Prediction Markets Harness collective intelligence Collective wisdom of the crowd is better than that of the smartest individual Use with caution Not suited for “indeterminate” events such as innovation contests, product ideas

PART 2 Using innovation to create value from IT: How to get there?

The path to IT value New thinking Show value for money New Business Value

New thinking  IT is cost of doing business

New thinking  IT is cost of doing business Best avoided, positions IT as a pure utility!

New thinking  Purpose of the IT function is to deliver great technology to the enterprise

New thinking  Purpose of the IT function is to delivery great technology to the enterprise How would you measure the value of an exercise machine?

New thinking  Nothing is perfect, especially something as complex as IT

New thinking  Nothing is perfect, especially something as complex as IT They fail too often, we can’t trust them!

New thinking  Rules must be enforced rigidly

New thinking  Rules must be enforced rigidly Have you communicated why?

New thinking  The business is IT’s customer and the customer is always right

New thinking  The business is IT’s customer and the customer is always right Shapes the thinking that IT is not part of business Complex and brittle legacy environments Demand exceeds supply Does not mean enforcing rules without cause being clear

Show value for money  The IT organization is providing the - Right services - At right level of quality - At competitive price  The rest of the business knows this

How to show value for money?  Measure and communicate IT performance in a way that the rest of the business understands  Benchmark IT performance against peers  Provide data that will help the enterprise manage consumption of IT services

Measure and communicate IT value  Unit cost and service quality of every service

Measure and communicate IT value  Unit cost and service quality of every service e.g. cost per mailbox availability message delivery time spam percentage

Measure and communicate IT value  Unit cost and service quality of every service e.g. Infrastructure services: cost per second availability of contract sales application time per transaction

Benchmark: never, ever discuss cost apart from quality

Help the enterprise use IT well  Smart consumption e.g. chargeback reports show unit costs and usage of service, Each service is marked with an index that captures how much can the user control costs (e.g. printing) Be very proactive in showing IT effort to cut costs for services that users do not control directly

Positioning IT as an investment in business performance

Needs identification  Which business outcomes matter the most?

Needs Identification  Clarify the firm’s current strategy  Analyze business processes  What are key operational metrics? How?

How IT improves business performance? IT provides information that employees can use to perform better e.g. capital one IT provides information to customers and suppliers to get tighter relationships e.g. Progressive Insurance Processes internal to the company are optimized better Change how customers/ partners interact with firm e.g. integrating a global supply chain Scope of change InternalExternal Improve decision making Improve process

Selecting IT investments  Figure out costs, benefits and risks for different investment types: - Run the business - Grow the business - Transform the business Risk is increasing from top to bottom Benefits may be measured in financial or operational terms May have to use operational metrics more from top to bottom

Have a predefined model to select investments e.g. Intel’s BVIT IT efficiency = An index for enhancement of IT infrastructure Business Value = An index for the project’s impact on Intel’s strategy and priorities Financial Value = Index for investment cost- benefit (bubble size)

Getting the best value from IT investments  Business Process Redesign, Application development and organizational change management

If you don’t measure value, someone else will take credit for it! Should you measure value created, or is it too difficult and risky?

Does an IT budget at 4% of revenue look good, when the industry benchmark is 2%? Should you measure value created, or is it too difficult and risky?

How to measure value?  Best time is when project is approved and before it is provisioned  Clearly decide which financial and operational metrics are in focus  Baseline these numbers  Set up a machinery for post-implementation review process

To summarize…

Finding IT gets new opportunities: Prediction Markets IT provides information that employees can use to perform better e.g. capital one IT provides information to customers and suppliers to get tighter relationships e.g. Progressive Insurance Processes internal to the company are optimized better Change how customers/ partners interact with firm e.g. integrating a global supply chain Scope of change InternalExternal Improve decision making Improve process

49 APPENDIX ADDITIONAL RATIONALE, DESIGN THEORY ETC.

50 What are Prediction Markets?  Means of - Aggregating and Disseminating Information  Prediction markets can be used when the following exist/ can be put in place: - Incentives to seek distributed information And not personal opinion => Do you like this movie? vs. Do you think this movie will be liked by majority moviegoers? - Incentives for truthful information revelation Why should people make an effort to give you any information? - An algorithm for aggregating diverse opinions How to aggregate the information collected from people?

51 Why do Prediction Markets work?  Diverse crowd of independent thinking people are better than predicting the future than the brightest experts - Diversity of information - Diversity of analysis in processing information - Interdependency between participants Through prices and bid-ask spreads If don’t believe in consensus view, can invest and move the market –Put your money where your mouth is - Works well when individuals have a personal financial stake in getting it right The credibility of the equilibrium is due to self-interest of participants

52 Why do Prediction Markets Work?  What other tools might one use to collect a group’s judgments? - Can one get similar forecasts by suitably designing these tools like polls?

53 Polls and Prediction Markets  New Poll Design - Each respondent has 100 points that can be spread across different yes/no questions Each point to a correct response yields $1 - A correct response yields a monetary outcome Incentive to allocate points as per rational beliefs and not opinions Will this now work like a prediction market?

54 Are Prediction Markets Any Different from Polls?  In prediction markets - Interdependence of participants Communicate through prices and bid-ask spreads –People may actively seek/ process information –So opinions evolve Improves overall market accuracy - Reflect strength of beliefs of participants Unlike in a poll where there is no downside

55 Are Prediction Markets Different from Polls?  New Poll design - Respondents will allocate maximum points to the “surest” bet Can’t resolve ambiguity  Prediction Markets - Price quickly stabilize in “sure” things - Gains of trade remain only in ambiguous things Hence participants are forced to focus on these questions

56 Problems with Corporate Prediction Markets  Do you really want to know what it would reveal? - Even if it is bad news Sometimes predictions are made just to keep motivation and employee morale up PMs are transparent and results cannot be fudged, unlike a consultant’s report - Would the insights need to be shared with investors? Google doesn’t use prediction markets to forecast revenue!

57 Diversity – meaning? You can think of diversity as cognitive differences Perspectives: ways of representing situations and problems Interpretations: ways of categorizing or partitioning perspectives Heuristics: ways of generating solutions to problems Predictive Models: ways of inferring cause and effect

58 Issues in designing questions… Issues in designing questions…  Seek knowledge and not behavioral opinions  Is the earth getting warmer? Or, Are there weapons of mass destruction in Iraq? - Unambiguously verifiable at end of a given time period Mutually exclusive Collectively Exhaustive

59 Corporate Prediction Markets Google Product launch dates Number of new Gmail users Best Buy, Boston ScientificYahoo Which product ideas merit further development? Microsoft Is a project ready for testing? HP Forecasts of printer sales