Penn State Idea Futures Market works to ease HR decisions

Penn State Idea Futures Market works to ease HR decisions

University Park, Pa. -- Two Penn State professors are exploring how an online forum in which people express their forecasts on future possibilities through financial bids can help human resources directors make strategic decisions in an informed manner.

Rose Baker, an instructor with Management Development in Penn State Outreach, and David Passmore, professor of education in the College of Education, have developed a test version of this market in conjunction with the Human Resources Institute, which provides critical information about human resources (HR) to its Members' Network. The Penn State Idea Futures Market will contribute to the collection and dissemination of this strategic HR information.

Faster, Better Forecasts

HR decision-makers must forecast answers to many uncertain questions to be able to make strategic decisions. For example: Will customers purchase and adopt a product or service? Will developers deliver a product or service by an agreed deadline, and, if not, how far will the delivery slide beyond the original due date? How do external factors -- political, social or economic trends and events -- affect markets for products and services?

Obtaining answers to these questions usually involve costly surveys, focus groups, opinions of expensive consultants and other sources of information. Also, interpreting this data requires costly research expertise and technical analytical skills. Moreover, it is so complicated to collect such information, that it typically is collected once, not continuously, which might limit the quality and timeliness of decisions made.

By using an "idea futures market" or "prediction market," decision-makers can monitor a group's understanding about these questions over an extended period of time. These markets are used most commonly to aggregate information about the likelihood of future scientific, economic, political and social developments and events. These markets function in ways that are cost-conscious, relatively simple, and dynamic.

Much like traditional futures markets

The Penn State Idea Futures Market operates much like traditional commodities future markets in which participants forecast the future prices of contracts for corn, metals or other commodities, except that in this online market, people speculate on the possibility of future events.

Upon entering the market, participants receive an account with a starting amount of "simulated" money with which they can buy and sell contracts promoting a particular future event. Buyers and sellers base their decisions about these future events upon their knowledge and/or intuition.

Prices aggregate and relay information

The contracts are sold for any value between $0 and $1. Interestingly, the prices of contracts reflect the probability assigned by traders through the market to the beliefs that events will (or will not) occur. So, a contract price of $0.57 for the contract "Revenues from sales of our new light bulb design exceed $150 million by 30 June 2008" indicates that traders collectively believe there is a .57 probability that this will happen.

Prices of contracts will change over time, as the information that traders use to make decisions changes. The prices of the proposed ideas come to reflect the aggregated belief that the proposed events will be realized, are dynamic in the sense that they are updated continuously based on market activity and are responsive to the perceptions of idea traders about external factors that may affect that future event.

This ability of markets to efficiently collect and distribute information has been well documented since the 1940s, when F.A. Hayek generated the hypothesis that, through the price discovery process, markets collect information widely dispersed among individual traders and share this information with all traders. Building on the "Hayek Hypothesis," markets now are thought to anticipate events such as changes in price inflation, shifts in federal monetary policy, or prospects for disruptive events like war or labor stoppages.

Idea futures markets have performed spectacularly in, for example, predicting the outcomes of political elections, sales revenues for Hewlitt Packard, delays in Siemens Austria software development projects, and drugs that Eli Lilly brings to market. These markets are applied in such diverse industries as consumer appliances, display technologies, steel making, advertising, packaging and media.

Visit the Penn State Idea Futures Market at http://psuideas.newsfutures.com where it currently is in a testing phase with volunteer HR directors. Test markets are structured to examine immigration policies and events that affect U.S. employers.

For more information, visit http://www.personal.psu.edu/dlp/hrps/ online.