The Prize Economy

There’s a prize for that.

Photo: Douglas Tengdin

Increasingly, organizations are using prizes to encourage innovation. Know of a way to improve smartphone voice recognition? There’s a $10,000 price for that. Design a delivery drone? $50,000. Got a solution for how to repurpose carbon emissions to reduce the potential for global warming? That’s worth over $50 million. If you can think of a persistent, society-wide problem, there’s probably a prize associated with it.

McKinsey & Co. estimates that there are over 30,000 significant prizes awarded each year, with a total value of over $2 billion – and the amount is growing. The grand-daddy of all innovative prizes – the Nobel Prize – gets more publicity every year.

And this isn’t something new. In the early days of aviation, a British newspaper offered 500 pounds for the first pilot to fly an airplane across the English Channel. In 1714, the British government offered a reward to anyone who could figure out a simple and practical method to determine a ship’s precise longitude.

Our patent system is a prize of sorts, offering inventors exclusive use of a patented new machine or process – rights that may hold significant financial value. The US Constitution actually states the purpose behind our intellectual property rules: “To promote the progress of science and useful arts.”

Most prizes are winner-take-all affairs, with nothing given for coming in second. This could seem like a waste: people who try and fail get nothing. But that’s the way research works. Scientists conceptualize a problem, then an approach, then modify things, then try them again. It’s an incremental process of trial and error and modification and trial again.

Source: LiquidPiston

Recently a small company developed a tiny 2 hp engine that runs on diesel fuel and has the potential to revolutionize hybrid electric motors. They won several small prizes along the way, which convinced early investors to stick with them. The payday will come when our automobile and truck engines weigh less than half of what they do now.

This is what an innovative economy looks like. “Let a thousand flowers bloom.”

Douglas R. Tengdin, CFA

Chief Investment Officer

Leave a Reply

Your email address will not be published. Required fields are marked *