Prediction Markets or Insider Trading Could Reveal Information Hidden from Upper Management

Michael Giberson

Larry Ribstein suggests that at least some of Boeing’s troubles with the 787 might have been avoided if either insider trading was permitted in Boeing’s stock or the company was operating internal prediction markets focused on project completion.

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.

[Cross posted from Midas Oracle]