Thank you, Midas Oracle.

Addendum: Don’t get fooled by any other statement.

No liquidity at Bet2Give. This exchange is a failure.

Old prediction market at HubDub:

When will the maiden flight of the Boeing 787 Dreamliner occur?

He acknowledges one counter-argument may have some merit – short-term traders may suffer an adverse selection risk which will be priced into the market in the form of larger bid ask spreads – but he suggests these costs are probably more important in theory than in practice.

Manne then adds a new line of argument, suggesting that efficient stock prices serve a corporate governance function by aggregating information about the firm that doesn’t always flow smoothly to upper management through normal channels. One of his examples:

Consider the plight of a top manager of a corporation considering the expansion of a major division of the company. He has probably received rosy reports about the division’s performance even though, perhaps contemporaneously, the price of the company’s stock is in sharp decline. … Clearly that manager has some unbiased information that things are not all they appear in his reports to be, and prudence dictates finding out what is really wrong with that division before approving the expansion.

A scenario like that would not be realistic unless someone with information more reliable than that given to the top executives was trading in the company’s stock.

Manne counts this corporate-governance argument as a significant addition to the discussion about insider trading launched by his book over forty years ago.

Given regulation of insider trading, Manne suggests that today companies could use prediction markets to generate some of the same kinds of information. He doesn’t develop the prediction market argument much, it mostly serves as a tool for developing the information aggregation and corporate governance discussion. However, the article may be of interest to prediction market specialists because it highlights the value to corporate executives from access to an aggregated, anonymous opinion about the company, and suggests that prediction markets can help companies capture that kind of value.

(Published in Journal of Corporation Law, volume 31, No. 1, Fall 2005, pp. 167-185. Larry Ribstein invoked Manne’s views on prediction markets in discussing Boeing’s multi-million dollar surprise in the form of hidden (from top management) flaws in the development of the 787. Ribstein’s post was discussed here a few days ago. See also the overview of a related paper by Robin Hanson, “Insider Trading and Prediction Markets.”)

The quotes that Ribstein draws from the Wall Street Journal article on Boeing highlight two problems – one with project management, and the other with senior management’s lack of information about the problem. From the WSJ:

Boeing Chairman and Chief Executive Jim McNerney said the company has sent manufacturing and procurement experts numbering “in the hundreds” to suppliers’ factories after discovering problems with the first 787 delivered to Boeing’s final assembly line. Those problems, including a serious lack of documentation on the work remaining to complete the first airplanes, drove the company’s decision this month to delay the first 787 deliveries for six months and to replace the head of the plane’s development efforts. Noting that Boeing was “surprised on the physical reality” of the condition of the first plane, Mr. McNerney said officials “realized we really need to work with [suppliers] to make sure we have better visibility” on the manufacturing process. “We need that data transparency across all of the build in order to execute the plan that we’ve laid out.“

Then Ribstein asks:

Could prediction markets reduce surprises and provide better corporate governance? Henry Manne thinks so. See Insider Trading: Hayek, Virtual Markets, and the Dog that Did Not Bark. An internal prediction market, say inside Boeing, might cull information from all nooks and crannies of the organization that might not otherwise be forthcoming.

Ribstein also suggests that had unregulated insider trading been allowed in Boeing stock, it may have also tipped off upper management to the problems. In Manne’s article, Manne makes similar claims for insider trading – not too surprising given his history on the issue – and then Manne suggests that prediction markets might do a better job than insider trading in this regard.

Obviously, in hindsight, Boeing had exactly the kind of problem that prediction markets can help resolve. Clearly all the information available to some people in the organization was not flowing smoothly to all the people who needed to know. Equally obviously, the cost of setting up such a market would have been much smaller that the costs the company is now facing. Given the high-level, resource-intensive intervention into 787 project management, apparently the surprising delays were judged to be a multi-million dollar problem. (Clearly, this guy was onto something in asking for airplane prediction markets. Bet2give arrived too late on the scene to help Boeing this time, but there is still time for more things to go badly, so maybe some value there if trading builds up.)

And the informational problem isn’t just at Boeing – Ribstein also mentions “Merrill’s $8.4 subprime hit.” A near endless list other examples could be plucked from the business headlines. There may be other organizational reforms or information technologies that would have also brought these problems to the attention of upper management in a more timely fashion. Are they better, or worse, than prediction markets?

Given the high stakes, any company that aspires to be a world-class operation should be asking these questions.

[I’ll post an overview of Manne’s article in a day or two. -MG]

Air Force Times – Blended-wing aircraft starts test flights

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Psstt… On July 9, 20007, we asked for ScramJet prediction markets. PopSci’s PPX has just opened a prediction market on whether a scramjet-powered vehicle will reach a top speed of Mach 15 by the end of 2009. Fantastic.

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I said 10 times on Midas Oracle that we should have plane orders prediction markets. What we would have seen, in this case, is the crash of the “Boeing will do better than Airbus in S1″ event derivative, starting from the date of last month’s aviation fair in Le Bourget, France, where Airbus released sale figures.

Airbus A350 XWB:

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Boeing 787 Dreamliner:

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A350 vs. Dreamliner prediction markets, anyone??

A350 Termination prediction markets, anyone??

QUESTION: Airbus has bet on big airplanes — the A-380 can seat 550 passengers. Boeing has bet on efficient airplanes. What makes you confident that you’re right?

BOEING CFO: It’s not just efficient airplanes. We’re also looking at smaller airplanes that can fly farther and join city pairs. Early on you built bigger planes because bigger planes could fly longer distances. With the advances in engine technology, that’s no longer necessary. We think most people would like to fly point to point. When you build a large airplane, you have to employ the hub system because the large airplane can’t access most of the airports. So you have to fly somewhere you don’t really want to go to finally get on the airplane you want to get on. That’s what has differentiated us on strategy and product offerings. The 787 can fly longer and has the same per-seat economics as large airplanes, so it’s affordable. It’s a good value proposition for our customers.

Hmmm… Airline companies employing the A380 can be more cost efficient.

–> I’d like to see some (mid-term?) prediction markets on this.

No: 55%

Yes: 45%

Airbus has once again delayed the delivery of its first double-decker A380. Airbus Chief Executive Christian Streiff told reporters and analysts on a conference call it was reviewing Airbus production sites with a view to consolidating and increasing outsourcing. The company said delays in A380 production would lead to a cumulative operating loss of 2.8 billion euros until 2010. Airbus now plans to deliver the first A380 aircraft in October 2007.

market ends: Oct 31, 2007 @ 11:59 PST :: created by herenow