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A Bull Market in Market Research

(originally published by Booz & Company)

Focus groups, surveys, and other traditional market research tools have their place in predicting demand for consumer goods. But mock stock exchanges, which trade in ideas, may provide an even better way of doing so, especially when marketers need to analyze a large number of products and opportunities.

In such an exchange, the relative value of different product concepts or product attributes is determined by the buying and selling of shares on an open market. By watching how the value of product ideas fluctuates, companies can glean insights into what consumers like, don’t like, and want.

Consider the Hollywood Stock Exchange ( The 850,000 members of this Internet bourse buy and sell shares of “MovieStocks” with “Hollywood Dollars” (H$), with H$1 representing a million dollars of box-office receipts in the first four weeks of the movie’s release. A month before the release of The Lord of the Rings, the movie’s stock was priced at H$233.89 million. Four weeks after the movie’s release, the actual box-office take was strikingly close, at $228.32 million.

Studios can watch a movie’s stock price to see how the public is reacting to prerelease advertising and promotional campaigns. Combining this new market research technique with traditional methods, studios can also pay HSX for additional market intelligence. For instance, HSX segments its users by demographics and surveys them about their moviegoing behavior (e.g., which movies they see). The company can even compare and contrast the demographics of traders interested in different movies. Studios can use such information to adjust their promotional campaigns and distribution strategies.

The Iowa Electronic Markets (, run by the University of Iowa Tippie College of Business, is a similar mock stock exchange that focuses on election outcomes. Political campaigns regularly use election data from the market, which often is more accurate than preelection polls.

Another such idea exchange is the Foresight Exchange Prediction Market (, which invites traders to do an IPO of an event stock, such as “Apple Computer dies by 2005.” Subsequent trading focuses on the probability the event will actually happen.

Monitoring trading in ideas may seem a roundabout way of evaluating consumer opinion. But observing the outcome of a group’s trading provides an indirect reading of its members’ collective opinions — and the information gleaned from watching mock stock markets is potentially more revealing than the answers to direct questions posed in surveys and focus groups. These latter methods sometimes are flawed because not everyone in the sample is equally knowledgeable about, or interested in, the product in question (individuals might participate only for giveaways or money, particularly in the case of focus groups), but everyone’s responses are given the same weight.

Because marketplaces like HSX are fun, engaging, and filled with people who are interested in the products traded, stock prices reflect consensus opinion with remarkable accuracy. This is true even though there are always traders who buy and sell stocks for reasons unrelated to the underlying product, for example, arbitrageurs who buy undervalued stocks and momentum investors who flock to rising stocks and push prices higher. (Interestingly, such herd behavior mimics how some consumers choose which movies to see.)

Stock trading aligns the players’ motivations with telling the truth; traders try to maximize the financial value of their stock portfolios and, in the process, reveal their real opinions. By contrast, surveys and focus groups can discourage honest responses. It is not unusual for people to want to please the interviewer or conform to others’ opinions.

With a little imagination — and software — a company might create a market in ideas to weigh decisions as diverse as selecting the preferred ingredients for a chicken soup or picking an advertising campaign pitchperson for an automobile launch. Stock prices can stabilize quickly — perhaps within 15 minutes. Comparing valuations then gives a sense of the optimal composition for the soup, or which actor would be the best spokesperson. Stock trading games can be conducted in various settings — at a central interviewing facility, during an industry conference, over the Internet, etc.

The greatest value of mock stock exchanges may be that they enable analysis of hundreds of ideas, which can be whittled down rapidly to a few candidates. Traditional market research is not nearly as efficient because it’s virtually impossible to design a single useful survey that incorporates so many product concepts or attributes.

Who knows? As the technique is refined, it may save us from another Pearl Harbor. The movie, that is.

Ely Dahan,
Ely Dahan  is an assistant professor of management science at MIT’s Sloan School of Management. Collaborating with Professor Dahan on the ideas presented here were MIT Professors Andrew Lo and Tomaso Poggio, and MIT Ph.D. students Nicholas Chan and Adlar Kim.
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