If I Had A Million

I’ve been telling folks for a long time that if I had a million dollars to spend on a project, I’d implement an idea I posted first twelve years ago today, and described in Forbes sixteen months ago:

Make two subsidized real-money markets on the stock price of each Fortune 500 firm, one market conditional on its CEO stepping down by quarter’s end, and the other conditional on not stepping down.  The difference between these two prices would advice the board on dumping the CEO.

If active, these markets should attract business press, and then most of these CEOs would come to see what the markets say about them.  Half a million would pay for legal/admin.  The other half would only cover a $1000 subsidy per firm, but CEOs trying to manipulate would add lots of liquidity.  A few years of data would let us clearly compare the returns of firms following market advice to firms not following.   With clear data I’d encourage shareholders to sue boards ignoring market advice, and after a few wins most boards would weigh market advice heavily.   A revolution in CEO accountability would then be complete, all for only a million.

Technically, I’d also create a third market per firm in the chance the CEO will step down, and force the three prices to be consistent with external stock prices, so there’d only be two independent degrees of freedom.

Added: And of course this would be a huge foot-in-door legitimization and exposure for many other kinds of organizational decision markets. 

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  • http://www.hopeanon.typepad.com Hopefully Anonymous

    I’d have to think about it more before commenting, but it’s an interesting idea.
    I don’t see on it’s face why you’d need $1 million dollars to implement at least rudimentary versions of this.

  • http://www.ciphergoth.org/ Paul Crowley

    Hopefully Anonymous: without a war chest such a project would quickly be sued into oblivion.

  • Dan

    I do have $1M to spend and I’ve looked at establishing real-money markets before (for different things). The legal and regulatory costs are at least an order of magnitude more than $1M from what I can tell. I don’t have $10+M to spend…

  • http://www.hopeanon.typepapd.com Hopefully Anonymous

    Paul Crowley, that wasn’t the reason Robin provided for the million dollars. But I don’t think it takes a legal expert to see that if Fortune 500 ceo’s or their proxies wanted to sue a project like that into oblivion, a $1 million dollar “war chest” would not offer much of a deterrent.

    “With clear data I’d encourage shareholders to sue boards ignoring market advice, and after a few wins most boards would weigh market advice heavily.” If this idea is viable, then Robin, you might do well to pitch it to leading plaintiff securities litigation firms.

  • Tony Henke

    It seems to me that the market will often predict that the stock price will be lower if a CEO is let go before the end of the quarter simply because there is a significant probability that some sort of disaster or scandal will hit the company for which the CEO will be let go even if it was out of his control.

    And, since some companies may be more prone to this sort of PR maneuvering than others, you may get extra degrees of freedom.

  • http://hanson.gmu.edu Robin Hanson

    Dan, I agree that $10+M might be required in the U.S. – I was thinking of going offshore to whatever locale was most cooperative.

    Tony, the clearest market advice would come during the day before the board made their choice to fire or not.

  • Bob

    Tony, I agree that even with a good CEO there is a correlation between the firm’s performance and the probability of CEO turnover. But you could observe the “average” gap and still draw solid conclusions based on deviations from the norm.

    Robin, why the “let go” language? Wouldn’t you get even better information from a bet based on the stock price if the CEO dies? This would help eliminate the gap that Tony points out. Very morbid, I know, but that might generate even more publicity.

  • http://profile.typekey.com/bayesian/ Peter McCluskey

    I doubt that CEOs would start manipulating markets before influential people started watching the prices. And influential people aren’t likely to watch the prices until there’s a fair amount of trading volume. A $1000 per company subsidy doesn’t seem sufficient to generate that much trading volume.
    I expect that even if it did attract enough traders, much of the subsidy would be spent on markets that yield little information. I expect that for the average firm, traders with only a few thousand dollars to gain would fail to identify any advantage to firing the CEO. But a long-shot bias might cause those markets to suggest a benefit to firing the CEO.
    Maybe if you only created markets for firms whose stock price performance was in the bottom 10% over the past few years, you would focus the subsidy on firms sufficiently troubled that a sizable fraction of the CEOs ought to be fired, and where the market gives odds of firing close enough to 50% that the long-shot bias doesn’t dominate.

  • http://liveatthewitchtrials.blogspot.com/ david curran

    >The legal and regulatory costs are at least an order of magnitude more than $1M from what I can tell.
    Posted by: Dan | April 26, 2008 at 12:51 PM

    In what country? The number of online bookies based in Ireland suggests it is much cheaper to run markets here.

  • http://www.fungible.com Tim Freeman

    Robin, is there some barrier to proposing this as a contract on intrade.com?

  • Mason

    How many readers do you have? How many have an extra dollar? I’d make a $10 donation or a $500 investment (and I’m a student). Looks like at least one of your readers might have a little more cash waiting for a good cause/return.

    But I think company’s would value a who-to-hire market over when-to-fire, but of course that is just more complicated and probably less liquid.

  • Oleg D.

    If a market condition is false (e.g. I bet on stock price given CEO steps down and CEO does no such thing), how are you going to decide payoffs? Or are you just going to give he bettors’ money back?

    • http://overcomingbias.com RobinHanson

      You just give bettors’ money back.

  • FreeMan

    Talk, talk, talk…. go DO SOMEthing with it! OR simply stop talking about it!

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