Behavioral Economics and Social Media

Humans are not usually rational. The neoclassical economists were wrong. We don’t make the best economic choices given more information. We do not plan for the future. We care about what others think of us. We act on impulse. All these things are the basis for Behavioral Economics Theory.

This (rather) new economics theory has caught momentum and is now one of the hottest topics in theoretical economics. Well… as hot as an economics theory can be. It blends psychology and neoclassical economics (the thing we generally call economics) to help explain why we act the way we act and to help policy makers increase the likelihood of better economic decisions.

There are many variables and a lot of information on the subject but for a better understanding we can look at some principles outlined by The New Economics Foundation:

  1. Other people’s opinion matters: we take great interest in what others think or do. We don’t usually get informed on economic topics. We usually copy behavior and decisions. Why? First of all we are a social species. We want to be socially acceptable and we can do that easiest by mimicking. It’s also easier.
  2. We are creatures of habit: even if what we do is economically wrong we will continue doing it out of convenience or because we have a habit that forces us to do what we do.
  3. We want to do the right thing: we have an innate sense of justice that leads our behavior. Most of us pay our fines not because we might go to jail but because “it’s the right thing to do”. We help others because it makes us feel good, not because there is any financial incentive in it. Actually such incentives may actually be counter-productive as they take out the primarily motivation – doing the right thing.
  4. We act according to our self image: we care about our commitments and we like to stand up for what we believe in. We see ourselves in a certain way – that leads us to certain kind of behavior in order to avoid cognitive dissonance.
  5. We are more loss averse than gain interested: we hang on to what we believe is ours. We treasure our possessions more than we value what we could potentially gain.
  6. We are not very good with data: we don’t really understand numbers, we’re bad at calculating probabilities and we take decisions based on how information is presented to us.
  7. We need to feel empowered to take action: too much information can lead to the inability to act. Too many options make us feel helpless. People need to have a clear understanding on how their actions affect the world around them to fully commit to any activity.

Behavioral economics in social media

Feelings, sharing, likes, friends, fans are not words we usually hear in business economics. We do hear them pretty often these days in social media. Business are starting to understand the importance of customers behaving socially. Social behavior is what drives companies to success or into the ground. There are no formulas in financial economics that can describe the feelings people have toward one company or another.

Classic economic behavior can be described in numbers on a spreadsheet but is not the way real people act. It is a flawed economic model in an economy that results in debt and frustration. The first result can be seen in the financial models we’re currently looking at. The second one cannot.

There is a growing media that helps express and amplify the principles of behavioral economics. That is the Social Media. With the growth of such social networking companies such as Facebook or Twitter, people started acting more and more connected. We now have an way of observing behavior with the help of social media. As it turns out all the principles of behavioral economics can be seen in social media. Let’s have a look at them:

Behavioral economics principles at work in Social Media

  1. Other people’s opinion matters: we care what our (Facebook) friends think of us. That’s why we share interesting quotes, we “like” only certain brands and we are very careful before posting something online.
  2. We are creatures of habit: first of all have a look at your behavior today. You have probably checked your Facebook timeline or Twitter profile at least once today. Why? Because you are accustomed to Facebook. You can’t give up checking the news, the photos your friends posted or the new products your favorite brand advertised on Facebook. Increase in mobile internet popularity is only enhancing this behavior.
  3. We want to do the right thing: people are sharing more and more social causes through social media. With over almost 1 bn users, Facebook acts as a catalyst for social causes. Social causes spread fast and users are very likely to share social messages. But that’s not all. Individuals as well as organizations now know that anything wrong-doing can have a long term negative impact on their life. Here is a video of a police officer pepper spraying demonstrators that quickly lead to a large negative social media response. If you were to search Google for the phrase “Sgt. Pepper Spray” you will find no less than 213 000 pages that frown upon his behavior. Eventually his email address and home address leaked to the internet. You can imagine the outcome.
  4. We act according to our self image: People have a certain self image that translates into social media behavior. For example: Barack Obama’s “Hope” presidential campaign was not really about the soon to be president. It was about the people that he represented. People found in the campaign a positive message for change. They’ve seen that the presidential candidate expressed a need for better people to run the country. People such as themselves. A lot of Obama’s success story happened on the internet where people expressed their views on “Change”. The messages they’ve spread were positive expressions of self image. People were not “like”-ing Barack Obama. They were “like”-ing themselves and the way they wanted their friends to see them.
  5. We are more loss averse than gain interested: Think about how often you see messages like “don’t lose the opportunity”. Why? Because they work. Groupon cashed in on the feeling people have regarding limited time discounts. So did Woot. Using loss-aversion works really well in online retail.
  6. We are not very good with data: If neoclassic economics theory would be true and if we really were rational beings, Groupon would never had caught on. Buying a discounted sky dive or a night lamp when we have ten already does not make sense economically. However, people did buy those things. Why? Because social media goes hand in hand with presentation bias. Suppose we see a 70% discounted offer on blue handkerchiefs that were already bought by 300 people. We think – “oh my, I must buy that handkerchief now or they will go out of stock. Look – 300 people already bought it”. The information has been framed (70%) and enhanced by other people’s behavior. We do not think whether we need the handkerchief or not, whether it is an economically safe behavior. We see the deep discounted price, we see that other have already bought this (see point number 1.) and we “need” to buy the handkerchief. Now.
  7. We need to feel empowered to take action: there are millions of products on Amazon. Billions of web pages indexed by Google. If we were to browse rather than search we would probably get frustrated and quit. However – we still use Amazon and we still use Google. Why? Because of targeting. Both companies dig through millions of terabytes regarding other people’s behavior to serve us the products and results we are most likely to buy or open. That makes our choices easier and we feel empowered to act.

I believe behavioral economics are here to stay. The kind of human behavior they explain has always been here. Social media is just acting as a catalyst to this kind of behavior. If we are to look deeper into behavior economics we need to use social media data to better understand the way we act and how can we get to economic results. The internet economy is growing at a faster rate than any other sector because successful online entrepreneurs already know the seven principles outlined here even if they’ve never heard of behavioral economics.

Is Facebook trading information with Apple regarding its users? Facebook-Apple partnership?

This is the question that popped into my mind as I saw a Facebook ad leading to an iTunes Album I have previously bought four of songs from (this one). I bought the songs on my iPhone from the iTunes Music store.

I instantly started thinking how could had Apple (or Facebook for that matter) target me so well. I can now see three possible explanations here:

  1. Sheer coincidence. Maybe … just maybe … Apple happened to market that album to the demographic group I happen to be in. Facebook had just shown me an ad pointing to the exact album I had purchased some songs from. Those 4 songs out more that 20 million songs currently available on iTunes. Not very likely, I presume.
  2. Apple and Facebook started an partnership and are now sharing user data. That means that right now Facebook may have access to my contacts, application data I use, purchase history, browsing history and others. Apple has access to my Facebook data, off-iOS related browsing history, Facebook related purchase intent and so on. More likely.
  3. Apple is using data from my Apple account to remarket products on other web platforms. Such as Facebook. This might mean that Apple is not actually sharing data but might be using data collected on the iOS to target users on other platforms. I believe there is an automated marketing system setup on Facebook for ads that run and target users based on their previous purchase history. Very likely
  4. Apple is using application data to target users. Possibly without express consent from the Apple Developers. I use different emails for Facebook and Apple login. This got me thinking about possible data usage by Apple without express consent from Facebook – or other developers. As I believe an integration with Facebook Ads would be impossible in this case without a partnership between the two companies. I would rather rule this one out.

Apple-Facebook partnership highly probable

Having two of the fastest and largest growing technology companies partnering is pretty much amazing in terms of products they could develop. However several privacy and monopoly questions might arise. Apple was part of a privacy controversy in 2010, regarding the iOS 4 privacy policy:

“The revised policy states that Apple has the right to share this information with 3rd parties who provide services to the customer, including advertising and promotion services. Apple also states that “it may be necessary” to provide this [real-time] information in response to “requests from public and governmental authorities within or outside your country of residence or if [Apple] determines that for purposes of national security, law enforcement, or other issues of public importance, disclosure is necessary or appropriate…. Additionally, in the event of a reorganization, merger, or sale we may transfer any and all personal information we collect to the relevant third party.”

The revised policy does not make any distinction between warrant-based and warrantless searches, nor provide what criteria would trigger the sharing of personal real-time information with government entities, nor allow an opt-out for the location-based information.”

Apple, and all the other technology companies for that matter, don’t really deal well with privacy. Mark Zuckerberg is known for stating that the age of privacy is over.

While that might be true and the younger generations are letting go of old-timey privacy concerns I still want my data taken care of with a bit of responsibility. After all I am a paying customer to Apple and not just a target for advertising. While I do appreciate a more contextual advertising as opposed to classic mass communication I believe I and all the other Apple users have the right to share our my information to whomever I choose.

Is there more to the Facebook-Apple partnership?

On one hand we have Apple with more than enough cash than it needs (110 billion dollars to be more precise). On the other hand we have one extremely high potential technology company that might change the way humans interact and is not doing very well on the stock market right now (Facebook stocks have dropped 47% from the IPO and keep going down).

Apple can take advantage on the blow Facebook took on the market and buy stocks that, in my opinion, are sure to rise again. Facebook could do really well with such an unexpected help. Both companies would benefit from such a move:

  • Apple is reaching a innovation plateau and it needs a young, visionary leader or product that might replace Jobs. Facebook and Mark Zuckerberg could fill the gap. Although Zuckerberg is still young and inexperienced he has a certain charisma that could develop in the future. Apple fans need an icon, they need innovation. Also – let’s not forget that Facebook is an one billion users market that Apple could turn into consumers.
  • Facebook is not harnessing the huge potential it has. Facebook gaming, social commerce, mobile are all things that are there but the Facebook team cannot yet capitalize on the growth. Apple is doing really well in all those areas and could share some of the knowledge.

In the end – maybe Apple will not take over Facebook but such a move would benefit both companies and is sure to add at least 10-15 years in the spotlight for them. Unfortunately such a technology behemoth will not be taken lightly by the Federal Trade Commision so the two will have to find ways to find ways to address this.

Internet in my car?

The internet connected car has been a great concept for quite some time now. As 3G connections  become more and more popular and 3G coverage extends to even the most remote areas car manufacturers have seriously taken into account adding internet to your car.

iSuppli’s telematics analyst Richard Robinson expects 25% of all cars to be internet connected in the next 5 years. Changes in auto industry in-car entertainment are expected to be as great as changes in entertainment post and pre dial-up internet connections.

audi connect
Audi Connect will be available to the 2012 luxurious models Audi A6, A7, A8

Intel expects the internet connected car to be the third fastest growing technology, after smartphones and tablets. Audi, Ford, Kia and Nissan are among the first to adopt such technology. Audi has equipped the A7 with a Wi-Fi system callled Audi Connect that turns the car into a hotspot able to host 8 connections at a time.

Ford has also jumped the wagon with its Microsoft powered Sync My Ride and has solved the connectivity issue with a simple internet stick solution.

In car internet killed the radio star

In car internet radio is now an option with MyFord Touch as drivers can tune in to their Pandora accounts and listen to their favorite stations.

Google, Apple, Samsung, Microsoft and LG are already testing connected cars concepts and gadgets. Google has recently confirmed that their self-driving cars have passed the 300.000 miles threshold incident free.

In car internet is surely to develop into a huge industry that will benefit car makers, entertainment and media companies, telecom operators, mobile device producers and of course – the buyers.

How does internet change the auto industry?

As consumers get more attached to their mobile devices and start expecting everywhere connectivity the auto industry will start monetizing on this trend. But that’s not all. What else should we expect? Here are a few consequences of increasing in car internet adoption:

  1. Increase in popularity and subscriptions to internet radios: there is a 52 minutes daily timeframe when 44% of all Americans listen to in-car radio. That margin will turn into revenue streams for internet radios and other internet music streaming providers.
  2. Location-based advertising will lead to a decrease in outdoor advertising: as advertisers will find it easier and more efficient to target consumers on their daily routes, by estimated income and purchase intents, billboards will become obsolete.
  3. Car traffic and mileage optimization: having large data available car manufacturers or internet services providers can offer the best real-time routes for faster navigation and better mileage.
  4. A new class  of in-car entertainment devices: GPS devices had a huge increase in popularity and sales as they were fitted to cars. So will the internet ready entertainment devices.
  5. Increase in driving safety: as more and more cars will get connected they will be able to pair and increase safety by automated collaboration.
  6. Increase in audio books sales. Audio books streaming. So far we got accustomed to listening to audio books on CD’s. With in car internet we will see more and more subscriptions to audio books streaming service. Amazon will surely benefit from this.
  7. Car hacking.  Car software security software. We don’t really expect our car to be “hacked” but this will surely happen. Where there is a connection, there is a potential breach of security. Software security companies will have offers specifically targeted to internet-connected car owners.

Key takeaways:

  • in car internet will happen. get ready
  • in 5 years 25% of all cars will have internet connections
  • there is a great business opportunity in providing connected car owners with car specific internet services

Mobile internet trends

It seems like everything goes mobile these days. Mobile phones get smarter, tablets get more and more popular and people use their mobile phones for much more than voice. Mobile internet usage includes news, entertainment, shopping, social networking and much more.

The Facts on mobile internet

First of all – what is mobile internet? It is the usage of internet on mobile devices such as handhelds, tablets, personal assistants, netbooks or laptops. It has become quite popular in the past 3 years growing growing from under 1% of total internet traffic in 2009 to more than 10% in 2012.

The mobile internet is expected to surpass desktop internet by 2014, as shown in the attached graph (source). Such a fast adoption rate is caused by:

  1. Decrease in PC sales (HP sales in the US decreased 12 percent in the second quarter of 2012 and Dell’s PC sales decreased by 9%).
  2. Increase in tablet and smartphones adoption (Apple alone has shipped over 60 million tablets in just 2 years from launch and more than 20 million iphones)
  3. Decrease in 3G connectivity costs (Idea Cellular decreased the costs for 3G connectivity in India by 70% )
  4. Mobile penetration is disproportionately larger than internet penetration. The global mobile adoption rate is now 86.7% . The global internet adoption rate is 32.7%. Mobile operators will grab out and reach the treasure that is mobile data traffic. They have the infrastructure, the clients and the distribution.
  5. Voice has been steadily declining compared to data traffic in developed countries.

Mobile internet plans are decreasing and adoption rate is increasing – what now?

With mobile internet plans decreasing we will see a clear increase in adoption rate. There is still a long way to go as mobile traffic accounts for only 10% of all internet traffic. Taking into account the fact that Internet has just 32.7% penetration we see that there is a huge opportunity there: mobile internet traffic is due to increase by at least 1000% in the next five years.

How can we benefit from mobile traffic growth?

Using this date one might think of this potential opportunities:

  1. Increase in cheap smartphones sales. As you can see in a previous article almost 75% of all mobile phones are owned by consumers in developing countries. This consumers need low-cost, decent performance, mobile internet ready devices.
  2. Increase in mobile operators revenue. The untapped potential of data traffic is even bigger than the one voice plans had. Mobile operators already have the client base, the mobile infrastructure and the distribution network to reach this potential market.
  3. Increase in mobile commerce: whether retail or paid apps distribution the mobile sales will increase in the future, even at a faster rate.
  4. Premium mobile entertainment: just like apps, paid entertainment will develop at an exponential rate in the future.
  5. Decreased market for desktop based software companies: Microsoft has already began to feel the surge in desktop sales as desktop based software such as Microsoft Windows, Microsoft Office will either adapt or fade away.

How is Facebook changing the Internet Economy?

By now you have probably heard of this little thingie called Facebook. You have also heard it has a bunch of users and these users are spending a lot of time on the platform sharing thoughts, news, photos, playing games or interacting with each other.

The Influence of Facebook on the Internet Economy

Right now Facebook accounts for roughly 30% of all internet users and is estimated that 20% of all pageviews on the Internet are on Facebook.

Facebook is big. It is so big that Internet World Stats added a special Facebook usage indicator to each country. As you can see there is no Google usage, no Yahoo usage, no Twitter usage indicator but there is a Facebook usage indicator. For good reasons too …

Using Facebook to increase online sales

In just 8 years from the 2004 launch, Facebook is expected to reach 1 billion users in 2012. That number is more than impressive. It is fastest adoption of any communication related technology.

Facebook related sales are a huge part of what lures giants such as Amazon, Apple, Ebay on the platform. From my experience Facebook seems to be the most profitable refferal for small and mid-size ecommerce companies and accounts for a large part of sales generated by larger online retailers.

While Facebook stores may not yet be the best choice (JC Penney, Gap and Nordstrom have opened and than closed their Facebook stores) there is a clear opportunity to be harnessed with Facebook related ecommerce.

Facebook creates jobs, has a  7.3 Billion Euro economic impact on Europe

A recent study by Deloitte states that Facebook accounts for a 7.3bn Euro economic impact and has so far, through the creation of Facebook pages and advertising , created more than 110.000 jobs in the EU.

Just like Europe many other regions benefit from the impact Facebook has had in the recent years. In the EU the country with the heaviest Internet Economy, the UK, has also the largest Facebook user base. Although merely a correlation and not a cause for the heavy impact the internet has on the UK economy it is easy to see that Facebook usage increases internet economy impact and many small and mid-sized companies can benefit from it.

Where is Facebook headed?

With such extraordinary growth and impact on our lives, both socially and economically, Facebook is sure to develop even more. Facebook is more than an website or application. It is a communication framework, a market that has already changed the life of its users. It will continue to do so. It will reach beyond extending the Internet.

I expect Facebook to cycle through some inherent changes but in the end it will probably be the biggest internet – based business in the world.

Mobile phones to help save lives

There are almost 6 billion mobile phones in the world and almost three quarters of these mobile phones are in developing countries. The mobile phones are probably the best connection people of the world have right now. With costs dropping and mobile penetration closing in to 100% mobile phones might be some of the best ways to tap into human behavior, especially in the developing world.

Digicel, the largest mobile operator in Haiti offered anonymized data regarding the post-earthquake behavior of almost 600 000 people. Results were astonishing. Using the data provided scientists Xin Lu and Linus Bentsson managed to create an algorithm that was able to predict with a 85% accuracy where were people going to go after the disaster.

Mister Xin Lu and Linus Bentsson started FlowMinder.org , a place where they can share their research and mobile operator data for NGOs and relief agencies. They believe that the 30 million people displaced by natural disasters can benefit form this and offer Haiti study as a proof of concept.

What are the opportunities and dangers ?

Several uses can be found in working with such data:

  1. Mobile medical assistance – there are places where the patient to doctor ratio is close to 20.000:1 . Using mobile services and self-help information we can states and private companies can setup healthcare automated services that can deliver helpful information to those in need. Moreover such services can help track the appearance of epidemics and evolution of diseases.
  2. Mobile war relief – on most cases war victims are just estimated statistics and data is gathered rather slow. Real time information is of the utmost importance when dealing with war casualties and refugees. NGO’s and relief agencies can quickly get an outlook on the situation and provide assistance where and when is needed most.
  3. Help fight literacy issues with mobile services – Ghana has an adult literacy level of 64% and an mobile penetration of 80.5% . Using mobile services and in the future rich media streamed through smartphones is a quick and cheap way to fight illiteracy issues.
  4. Help setup the base for barter-based markets in developing countries – using classifieds like services through mobile phones governments in developing countries can fight poverty and hunger while at the same time encouraging micro-entrepreneurial movements.

The dangers of  using mobile data

While many positive ways to use mobile services can be found there are several issues that arise such as privacy, ethical usage of data, security of provided data etc. For example – having data publicly available in a natural disaster such as the Haiti earthquake one might wonder how would this kind of data be used by robbers.

Even worse – in such tragic events such as war, public availability of data can, in the wrong hands, result in many deaths and suffering.

I can only hope that in this connected world we will all feel closer to one another, we will be able to put aside our differences and use technology for good rather than personal interests.

UK – the heaviest Internet Economy in the world

Internet has changed many aspects of our lives and will continue to do so. As people shift their attention more and more toward the internet so does the economy.

UK leads the way towards this new economy with a £82bn ($128 billion) internet economy. About 16% of this ecosystem is accounted for by mobile connections. The overall traffic is expected to increase each year between 2010 and 2015 by 37%. What does that mean? Having an ever increasing interest for mobile connections and ecommerce we might see three trends in the future:

  1. Mobile networks will need better infrastructure to handle the growing traffic.
  2. Mobile internet will increase in popularity which leads us to…
  3. Mobile commerce will set new challenges to retailers as consumers get more informed, faster deliveries and better deals

Data regarding these numbers has been put together on a study commissioned by Vodafone UK to ATKerney. You can find the study here.

It’s interesting to see that the internet economy reacts to people needs and wants as is stated in the graph bellow:

 

As you can see the internet is expected to be the most commonly used media in Europe by 2013, with 50% of all media consumption.

The other media (radio, print, TV) is expected to continue to decrease in the following years.

With smartphone usage doubled between 2008 and 2010 it is expected that smartphone terminals will be a major player in the internet economy ecosystem. Data is already used more often than voice. Mobile operators will adjust their market accordingly and that will increase the internet consumption even more.

Online retail (both web and mobile) accounts for roughly £45bn ($70bn) – approximately 6% of GDP, leading the UK to the 1st place in G20 countries as internet economy share of GDP.