Monthly Archives: November 2007

Cory Doctorow thinks so, in a piece subtly titled "How Your Creepy Ex-Co-Workers Will Kill Facebook":

Sure, networks generally follow Metcalfe’s Law: "the value of a telecommunications network is proportional to the square of the number of users of the system." This law is best understood through the analogy of the fax machine: a world with one fax machine has no use for faxes, but every time you add a fax, you square the number of possible send/receive combinations (Alice can fax Bob or Carol or Don; Bob can fax Alice, Carol and Don; Carol can fax Alice, Bob and Don, etc).
But Metcalfe’s law presumes that creating more communications pathways increases the value of the system, and that’s not always true (see Brook’s Law: "Adding manpower to a late software project makes it later").
Having watched the rise and fall of SixDegrees, Friendster, and the many other proto-hominids that make up the evolutionary chain leading to Facebook, MySpace, et al, I’m inclined to think that these systems are subject to a Brook’s-law parallel: "Adding more users to a social network increases the probability that it will put you in an awkward social circumstance." Perhaps we can call this "boyd’s Law" for danah boyd, the social scientist who has studied many of these networks from the inside as a keen-eyed net-anthropologist and who has described the many ways in which social software does violence to sociability in a series of sharp papers.

Cory has many more complaints  – and a separate one about privacy here.
Meanwhile Seamus McCauley thinks Facebook advertising is dead on arrival because people will get plug-ins to block Facebook ads the same way we all use Firefox to block the advertising on the rest of the web.

At the heart of Cory’s complaint is the idea that Facebook tries to trap us into eyeballing the site by, for example, sending highly uninformative messages – "Bob has send you a message on Facebook, click here to read it". He believes that we’ll all give up soon enough because it’s all too annoying.
I tend to agree. My research on rational addiction suggests that even heroin addicts will quit if the circumstances that led them into the habit change. If they can kick an unwelcome habit, so can Facebook users.

Seth Godin writes:

Just finished buying some checks online. Got to the page with the ridiculous charges for shipping and handling. They were:

Slow…$14 (Expected delivery, December 15th)
Fast…$18 (Expected delivery, December 10th)
Expedited…$18 (Expected delivery, December 5th)

"Wow!" I said to myself, "I’ll show them… I’ll get the expedited shipping without paying a penny more than fast."

As Seth realises, the "Fast" choice was almost certainly a deliberate bluff designed to draw customers towards paying for "Expedited".
But does this sort of shifty trick actually work? Not in the world of classical economics. But behavioural economist Dan Ariely has checked it out, and… it works a treat. His forthcoming book, Predictably Irrational, is strongly recommended.

Ruth_3 I neglected to alert y’all to Monday’s More or Less – which covered quants and the credit crunch, extreme weather and climate change, a 20-year old from Birmingham who solved an international mathematical puzzle – but you can download a podcast if you like.
Particularly recommended was Ruth Alexander’s experience in trying to find love using a dating algorithm:

First of all, the website invites me to answer a long questionnaire. How much reassurance do I need from a partner? How much do I give to charity? How tidy is my home?
"The majority of questions represent statements commonly heard by therapists in couples counselling," says True.com psychologist, Dr Garth Bellah.
The website then uses what statisticians call a regression equation to determine what sort of person I would be best matched with, according to my character and how that fits with historical data about other people’s relationships.
The company says it’s identified 99 distinct factors found in successful relationships. Another dating site says there are 29 – its mathematical match-making is based on research it says it’s done on 10,000 married couples.
Looking at the profiles of the men the computer highlighted for me, I was highly sceptical, bordering on horrified. But I gritted my teeth and sent a flurry of e-mails: would you like to go on a date with me and my microphone?
It turns out the compatibility test doesn’t yet measure aversion to journalists. Only two people e-mailed back – and one of those dumped me for someone else before we’d even met.
So I was left with one chance of love. And he was wearing a burgundy bow-tie and waistcoat. But our compatibility score was 94%. The computer said yes.

This was terrific radio. A fair test of the dating algorithm? No.
We were put onto the scent by Ian Ayres, author of Supercrunchers. He thinks that algorithms can do a better job than, say, friends, in finding a good love match. I am persuadable, but not convinced that the current products – which are confidential black boxes – actually do the job.
Here’s an alternative take on the maths of dating, in which I point out that we tend to adjust quickly to "market conditions" in accepting potential dates. More on that in The Logic of Life.

Ted Castronova’s new book, Exodus to the Virtual World is out. People are migrating to synthetic worlds – not literally, of course, but they spend a lot of time, money and attention there. I suspect that in Castronova’s capable hands the analogy will be pushed near to breaking point but not beyond it, and I’m looking forward to reading the book.
In a review of his earlier book, Synthetic Worlds, I wrote:

Many observers believe that online games are like real economies. In Synthetic Worlds, Castronova demonstrates that he knows better: online games are real economies. People devote time and skill to producing things that other people value, such as Jedi Knights. That’s supply and demand: an economy. The aliens and the light sabres aren’t real, but the human effort and the human desires are. It becomes easier to realise this when the synthetic economies spill out into the corporeal one – when grand wizards are bought and sold on eBay or Romanian entrepreneurs supervise workshops of virtual gold-miners.
One synthetic world, Second Life, offers no game-play as such but sells virtual real-estate that users can build almost anything on. One real-estate maven, “Anshe Chung”, a Chinese teacher based in Germany, is reported to make $150,000 a year buying, improving and reselling virtual homes in Second Life. Others have businesses designing virtual clothes or selling virtual advertising. “Tringo”, a game-within-a-game that was created and made popular within Second Life, was bought from its creators by Nintendo and released for the GameBoy console. (Tringo’s programmers, not the Second Life hosts, owned the intellectual property.)
At this point it is possible to take the discussion in almost any direction, and Castronova tries many. He has an eclectic approach to research – some amateur sociology, a spot of anthropology, some national income accounting with liberal use of the back of the envelope. The research occasionally seems a little flaky, but it’s well ahead of the gushings of consultants and media pundits. Meanwhile, Castronova’s grab-bag of methodologies works fine for exploring unmapped territory.

Castronova writes about the new book:

I try to project the medium-term impact of virtual worlds on daily life in the real world, especially in regards to politics and policy. To make projections, I rely on the history of human migration: knowing in general what happens when people migrate, we can forecast what’s going to happen as people migrate to virtual worlds. To explain why many will migrate, I propose a psycho-physiological theory of fun. Then I argue that the people who design virtual worlds are actually doing public policy. As such, their innovations will bleed over into real-world policy-making. You get some odd outcomes when you suggest that real world governments will try to please citizens raised in virtual world policy environments: things like zero economic growth, huge estate taxes, and full-employment economies, all at once. Bottom line: big political change is coming.

Monday’s FT reports:

The City is betting on UK house prices falling by 7 per cent next year in new tradeable derivatives contracts, which some bankers say is the best indicator of the market’s direction as millions of pounds are riding on the outcome.
These future housing contracts, which were published for the first time this year and have seen a surge in trading volumes in the past few months, are predicting much bigger falls in property values than other non-tradeable forecasts.

That’s not good. We all know that such money-on-the-line forecasts tend to do better than cheap-talk forecasts, even if the cheap-talk is from an independent analyst. Presumably some of those betting think that a fall of much more than 7 per cent is plausible. It is plausible; I don’t know where the idea arose that house prices fluctuate only between steep increases and pauses for breath. Certainly not from anyone observing the situations in Germany, Japan, or in the UK less than twenty years ago.

Seamus McCauley writes:

I like the atmosphere of a bookshop; I like the serendipitous stumbling-upon of new titles; I like to be reminded of other books I’ve enjoyed and to compare them to potential purchases; browsing for books is a pleasure in itself beyond the mere function of acquiring the book at the end of it. For this, I let bookshops overcharge me. I can live with the fact that the entertainment I get from browsing bookshops isn’t free.
Interesting therefore to see… that Jott is offering Amazon shopping by telephone: call them up, tell them the product you want to buy from Amazon, and they’ll email back with prices options. With just a couple of tweaks that could replace my expensive offline book-buying experience without diminishing my bookshop-browsing fun. Imagine – pick up a book in a bookshop. Call Jott (or whoever) and tell their system what book you’re thinking of buying. Hear the best price for buying it online, with delivery times. Put the book back on the shelf, and confirm to Jott you want the book delivered for that price.
Same for computers, iPods, cars…anything you can go to a shop to see but can probably buy more cheaply online…The only downside is that I’ll miss the bookshops when they go out of business.

Hm. A low-tech version of this was one of the justifications for retail price maintenance agreements: suppliers feared that customers would first visit a luxury retailer to get advice and sample a range of products, and then pick up the discounted version at some big-box store.
I tend to think of such agreements as far more likely to stifle competition and damage the consumer, including damage to the consumer’s lovely retailing experience. And I think Seamus’s scenario is unlikely. But I’ve been wrong before…
I reckon the book business is far more at risk from (better, sexier versions of) Kindle and Sony Reader.

Vani Borooah, an economist at the University of Ulster, writes to call my attention to his analysis of batting averages:

Batsmen in cricket are invariably ranked according to their batting average. Such a ranking suffers from two defects. First, it does not take into account the consistency of scores across innings: a batsman might have a high career average but with low scores interspersed with high scores; another might have a lower average but with much less variation in his scores. Second, it pays no attention to the “value” of the player’s runs to the team: arguably, a century, when the total score is 600, has less value compared to a half-century in an innings total of, say, 200. The purpose of this paper is to suggest new ways of computing batting averages which, by addressing these deficiencies, complement the existing method and present a more complete picture of batsmen’s performance. Based on these “new” averages, the paper offers a “new” ranking of the top 50 batsmen in the history of Test Cricket.

For serious cricket enthusiasts only, I suggest. The rest of need only know the bottom line: there is no plausible method of ranking batsmen that does not put Sir Donald Bradman at number one.

“Life’s not fair,” my parents always used to say. Bill Gates and the Mexican business magnate Carlos Slim each have fortunes of about $60bn, according to the rich-list boffins at Forbes. A 10 per cent return on that lot would produce a $6bn income, or about $200 a second. That is, very roughly, about what an American makes in a day or an Ethiopian makes in nine months. Small wonder that income inequality is a hot topic.

But reliable numbers on inequality are hard to find. Even in the US, there is no agreement over what is going on. Look across the globe, and the data problems are far more acute. The most commonly reported scare statistic compares the richest country with the poorest. But this method overlooks the fact that about 2.5 billion poor people live in rapidly growing India and China. A better, but more demanding approach summarises inequality both across countries and within countries. Such efforts suggest no strong recent trends in global income inequality, either up or down.

Those efforts have been led by Branko Milanovic of the World Bank. But now – with fellow economists Peter Lindert and Jeffrey Williamson – he has produced a more surprising result. He has found that income distribution within a modern society is much the same as income distribution in imperial Rome, or England and Wales at the time of the glorious revolution. It’s not that there is no variation at all, but that modern societies are as different from each other as from ancient societies.

The remainder of this column can be read here.

Dear Economist

British rock band Radiohead have come up with a radical price model for their new album In Rainbows: it is available for digital download and customers decide the price themselves. Could you elaborate on the economic principles at play? I chose to pay £5 out of love for original and creative content, but I admit that my behaviour is absurd from any rational choice model.

Stig, Copenhagen

Dear Stig,

This is just an electronic tip jar, and people’s payments are governed by a desire to feel generous – or at least, to avoid looking stingy. That desire is enough to persuade almost everyone to tip at a restaurant, but what about online? Less so, it seems.

According to one internet consulting firm, almost two-thirds of those who downloaded the album paid nothing, and those who did pay didn’t pay much – less than £3 on average. That makes sense: much easier to leave no tip when you don’t have to look the waitress in the eye, and Radiohead make more than your waitress anyway.

If the figures are accurate, the band seems to have made £500,000 or less from downloads in just three weeks; their traditionally priced CDs probably made the band 10 times more, at least. But it is too early to say whether this scheme was profit-maximising, especially since Radiohead have criticised these estimates.

There is more to this than direct revenue, of course. The stunt also brought free press for a band widely thought to be past its prime. That trick will not work again, and future electronic tip jars seem likely to be emptier.

I can’t say whether your payment was rational. I strongly suspect that this business model, in the long term, is not.

Questions to economist@ft.com 

A while ago, I wrote about how you might take control of your own marketing information:

A better system would be for us to compile a dossier about ourselves and our families, including birthdays and anniversaries, favourite authors and music, need for loans or mortgages, and what big purchases are under consideration. We would own that information and could give it or even sell it to companies who wanted our business. If the information was good enough, and used intelligently and sparingly, it could save a lot of time, effort and money.

That is the fantasy that companies hint at when they ask us to provide information, but we aren’t providing enough detail for them to send us much that we would really want to receive. Nor do we trust them enough to tell them more.

All that might be changed by agents who would manage our personal information on our behalf. This information agent would pay us for the privilege, and forward us offers in which we might genuinely be interested. The companies making those offers wouldn’t see our details – they would simply know that they were reaching 20 or 200, or 200,000 people with the characteristics they desire. We could be much more detailed in our dealings with the agent, specifying a desire for more offers, fewer offers, levels of confidentiality and an expiry date on the information.

A loyal reader now writes to tell me he is trying to do exactly this. I am encouraged to see theory put into practice. But will I be signing up? Not yet.

There is also the question of how a private company can survive buying and selling your data, when the government is giving it away for free

The Undercover Economist: a guide

Publishing schedule: Excerpts from "The Undercover Economist" and "Dear Economist", Tim's weekly columns for the FT Magazine, are published on this blog on Saturday mornings.
More about Tim: Tim also writes editorials for the FT, presents Radio 4's More or Less and is the author of "The Undercover Economist" and "The Logic of Life".
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