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 / Spring 2005 / Issue 38(originally published by Booz & Company)


Supermodels to the Rescue

How could the therapeutic and financial goals of the company and the aims of individual teams be better aligned? The company proposed to create a market in which drug development in the early phases of human trials would be contracted out to independent research companies. Management’s assumption, largely premised on economics, was that since different companies have different costs of capital and capital requirements, as well as different risk attitudes and resource constraints, a market among such companies might naturally match research tasks to companies willing to “own” the associated risks. These companies would then have clear incentives to judge the merits of any project in realistic terms.

Given the inherent uncertainties of drug development, and the difficulty in coordinating early and later stages of development, the company’s executives could not be sure the concept would work. To test the idea, they turned to agent simulation.

Aided by Icosystem — a Cambridge, Mass., firm specializing in agent simulations in business, and, like Eurobios, founded by people affiliated with the complexity-research organization Santa Fe Institute — the company constructed a virtual market in which agents representing employees would interact in plausible ways with other agents representing potential contractors, including contractors specializing in managing clinical trials. Within the model, each of the various agents was endowed with some plausible rules by which it would make decisions — about bidding on a particular drug compound, for example. The likelihood of a bid would depend on the company’s current resource availabilities and cost of capital, as well as its perception of a compound’s commercial potential. These rules reflected real data that the model’s developers collected on the capital costs, resource utilization, and costing strategies of independent R&D companies. With the model up and running, and the model showing reasonable results on simple tests, it could then be used to answer the principle question.

What the model showed, though, was this: The market-based idea was a little too simple.

“We found,” says physicist and Icosystem founder Eric Bonabeau, “that because of the diversity of players — their different motivations, aversions to risk, cost structures, and so on — the company could not possibly coordinate all of that activity in an open market.”

The model also allowed the company to test alternative options by which employees’ interests might be better aligned with those of the firm. One idea was to tie employee incentives, in the form of bonuses, to the success of all the company’s drug molecules, rather than just to a single project or set of projects. In this way, employees would not be deterred from doing the “killer experiments” that could weed out bad projects early on. By reducing the number of costly development misadventures, the model suggested, this plan could double the value of the company’s recently discovered molecules.

Seeing Around Corners
Twenty years ago, pharmaceutical executives simply could not have said with any confidence what might happen if they managed their R&D within a completely new framework. They would have tried their “market solution,” met with expensive failure, and then gone back to the drawing board, most likely only after several years had passed and the organizational wounds had healed. Simulation lets decision makers “see around the corner,” and businesses gain a competitive edge by exploiting it.

Several years ago, Nasdaq planned to change the tick size — the basic price increment — of its securities listings, and switch to decimalization from prices listed in fractions. The electronic securities marketplace anticipated that decimalizing and decreasing the tick size would make it easier for the market to discover the accurate price of stocks, because it would let traders express their market views more precisely. The result would be a smaller difference between the bid and ask prices at which traders are willing to buy and sell securities, making Nasdaq’s pricing more competitive and attracting both more investors and more listing companies.

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  1. Keith Oliver, Leslie H. Moeller, and Bill Lakenan, “Smart Customization: Profitable Growth Through Tailored Business Streams,” s+b, Spring 2004; Click here.
  2. Michael Schrage, “Here Comes Hyperinnovation,” s+b, First Quarter 2001; Click here.
  3. Eric Bonabeau, “Agent-Based Modeling: Methods and Techniques for Simulating Human Systems,” PNAS, Vol. 99 (May 14, 2002), 7280–7287
  4. Joshua Epstein and Robert Axtell, Growing Artificial Societies: Social Science from the Bottom Up (MIT Press, 1996)
  5. Navot Israeli and Nigel Goldenfeld, “On Computational Irreducibility and the Predictability of Complex Physical Systems,” unpublished; Click here. 
  6. Proceedings of the Agent 2004 Conference on Social Dynamics: Interaction, Reflexivity, and Emergence (University of Chicago Press, forthcoming); Click here.
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