Paul Ormerod is the author of the bestselling The Death of Economics, Butterfly Economics and Why Most Things Fail. Most recently he has written Positive Linking – How Networks Can Revolutionise the World. “We are increasingly aware of the choices, decisions, behaviours and opinions of other people. Network effects – the fact that a person can and often does decide to change his or her behaviour simply on the basis of copying what others do – pervade the modern world,” writes Ormerod.In this interview he speaks to Vivek Kaul on why a small number of people can exercise a decisive influence on an eventual social or economic outcome, why copying others is a rational way to work in this world and why the football club Manchester United may have simply been lucky to get where they have.
What is positive linking?
It is basically the principle that ‘to him that hath, more shall be given’. The fact, for example, that a particular brand of smart phone has been selected by one of your friends makes it more likely that you yourself will make the same choice. It doesn’t mean that you will definitely make the same choice, but the more of your friends who have chosen the same phone, the more likely it is that you will.
You suggest that a relatively small number of people can exercise a decisive influence on an eventual social or economic outcome. Could you explain that through examples?
This is one way in which positive linking can work. It is by no means always the case that this the process by which people are influenced. Often, the way in which behaviour spreads is through ‘friends of friends’ networks, in which no single person has a strong influence. Ideological or religious movements are ones in which a small number of people often exercise decisive influence. Think, for example, of Hitler in Germany, or Osama bin Laden in our own times. But these ‘influentials’ can be found in other situations. For example, Gene Stanley and colleagues at Boston University found that the distribution of the number of sexual partners across a sample of individuals essentially had this structure. Most people had relatively few, and a small number had very many indeed. This latter group exercise a decisive influence on the spread of sexual diseases.
You write “we have inherently less control over situations in which network effects are important than we would like”. What is a network effect?
A network effect is a very important example of positive linking. Network effects, the fact that a person can and often does decide to change his or her preferences simply on the basis of what others do, pervade the modern world. This concept is just as crucial for companies and markets as it is for people. In September 2008 Lehman Brothers went bankrupt, precipitating a crisis which almost led to a total collapse of the world economy and a repeat of the Great Depression of the 1930s. It was precisely because Lehman was connected via a network to other banks that made the situation so serious. Lehman’s failure could easily have led to a cascade of bankruptcies across the world financial network, first in those institutions to which Lehman owed money, then spreading wider and wider from these across the entire network.
Why does network effect lead to less control?
A key point about network effects is that there is inherent uncertainty about how far any given effect will spread. We have some guidelines about what determines this. So, for example, if a person adopts a new product, and the people in his or her social circle are easily persuadable, it is likely that some of them will adopt it as well. But if it is hard to get them to try new things, they will not. In the former case, there is a chance that the product will get taken up on a large scale, in the latter it will not. But in any practical situation we simply cannot gather the incredibly detailed information which would be required in order to know for certain what the impact will be. We need to know the exact structure of the relevant network, who influences whom. And we need to know the degree of persuadeability of everyone in the network. We can get approximations to these, but we cannot know them for certain.
What is preferential attachment ?
Preferential attachment describes a particular way in which a person might copy the choices which others have made. Given a range of alternatives, he or she will choose between them with a probability equal to the proportion of times each alternative has been selected by others. So you are more likely to select the most popular choice, simply because it is the most popular.
Could you elaborate on that?
The basic idea is straightforward. Suppose there are just three choices available to you, whatever these may be, and you are wondering which one to select yourself. One has been already chosen 6,000 times, one 3,000 and the final one just 1,000 times, making a total of 10,000 altogether. If we assume for purposes of illustration that the only rule of behaviour you are using when making your choice is that of preferential attachment, the rule says the following. You may actually choose any one of the three alternatives. But you are twice as likely to select the most popular rather than the second most popular, and six times as likely to choose this as the least popular. You are paying no attention to the attributes, to the features of the three alternatives.
Any examples of this phenomenon?
Thetop three sites which are followed up on a Google search typically reflect exactly this pattern. The three of them get almost 100 per cent of the subsequent hits after the search, and the top one of them all gets 60 per cent of the total.
You say copying the best policy in this day and age. Why is that?
We are faced with a vast explosion of such information compared to the world of a century ago. We also have stupendously more products available to us from which to choose. Eric Beinhocker, formerly at McKinsey, considers the number of choices available to someone in New York alone: ‘The number of economic choices the average New Yorker has is staggering. The Wal-Mart near JFK Airport has over 100,000 different items in stock, there are over 200 television channels offered on cable TV, Barnes & Noble lists over 8 million titles, the local supermarket has 275 varieties of breakfast cereal, the typical department store offers 150 types of lipstick, and there are over 50,000 restaurants in New York City alone.’
That’s quite a lot…
He goes on to discuss stock-keeping units – SKUs – which are the level of brands, pack sizes and so on which retail firms themselves use in re-ordering and stocking their stores. So a particular brand of beer, say, might be available in a single tin, a single bottle, both in various sizes, or it might be offered in a pack of six or twelve. Each of these offers is an SKU. Beinhocker states, ‘The number of SKUs in the New Yorker’s economy is not precisely known, but using a variety of data sources, I very roughly estimate that it is on the order of tens of billions.’ Tens of billions!
So what does it tell us?
The customer has tens of billions of options to choose from. Compared to the world of 1900s the early twenty first century has seen a quantum leap in the number of choices available. And rather obviously the time taken to evaluate and choose rises with the number of choices. Many of the products available in the twenty-first century are highly sophisticated and are hard to evaluate even when information on their qualities is provide. Take the case of mobile tariffs that are available in the market. How many people can honestly say that they have any more than a rough idea of the maze of alternative tariffs which are available on these phones? The range and complexity of choice are so vast that the only way in which people can cope is by adopting behavioural rules which spectacularly reduce the scope of choices available to them. This is the key reason that ‘copying’ has become the rational way to behave, the rational way to make choices in the twenty first century. The word ‘copying’ is , I should stress being used as a shorthand description of the mode of behaviour in which your choice is influenced, altered, directly by the behaviour of others.
How much difference can the copying motive make to the outcome?
It can make a huge difference. Duncan Watts, a professor at Columbia, ran some experiments in 2006 and published the results in Science, probably the world’s top scientific journal. He set up an experiment where a student could listen to 48 songs, and download for free any which he or she wanted. A number of students carried out this experiment. The end result was that the most downloaded songs were about three times more popular then the least. The experiment was repeated, with just one difference. The student was told the number of previous downloads which each song had. The impact was huge. This time, the most popular songs were over 30 times more downloaded than the least popular. A few songs got lots of downloads, most got very few. In addition, the connection between quality and success was very weak. As Watts noted ‘The best songs rarely did poorly, and the worst rarely did well, but any other result was possible.’
You talk about economist Brian Arthur’s urn experiment. Could you tell our readers about it?? What is the practical significance of this experiment?
This seemingly abstract piece of work has great practical significance. It is another way of illustrating why the Watts’ experiments have the outcomes which they do. Arthur’s initial work was on a highly abstract concept in non-linear probability theory, something called Polya urns. Imagine we have a very large urn containing an equal number of red and black balls. (The colours are immaterial.) A ball is chosen at random, and is replaced into the urn along with another ball of the same colour. The same process is repeatedly endlessly. Within this enormous urn, can we say anything about the eventual proportions of red and black balls which will emerge? They start off with a 50/50 split. Can we say how this split will evolve?
Indeed we can. Arthur and his colleagues showed that as the process of choice and replacement unfolds, eventually the proportion of the two different colours will always – always – approach a split of 100/0. It will never quite get there, because at the start there are balls of each colour, but the urn will get closer and closer to containing balls all the same colour. The trouble is, we simply cannot say in advance whether this will be red or black. Arthur’s equations also show that the winner emerges at a very early stage of the whole process. Once one of the balls, by the random process of selection and replacement, gets ahead, it is very difficult to reverse.
So what is the practical implication of this?
Suppose a new technology emerges. No one really knows how to evaluate the various products associated with it. The principle of copying seems entirely rational. Someone makes a choice. In the abstract model, this is the extraction at random of a ball from the urn. The fact that brand A has been chosen rather than brand B tilts ever so slightly the possibility that the next choice will also be A rather than B – this is the replacement rule in Arthur’s model. And so the process unfolds. In practice, of course, as one of the brands gains a lead over its rival, factors other than consumer copying will come into play and reinforce its dominance. There will be positive feedback, positive linking, so that success breeds further success. The more successful brand may be able to advertise more, for instance. Retailers will give more shelf space to it, and may even, in the splendid language of retailers, delist its rival, so that it becomes harder and harder to obtain. Technologies and offers which piggyback on the brands – think of apps and iPhones here – become increasingly designed to be compatible with the number-one brand.
You write “the most popular , the most successful, the biggest, does not stay there forever”.
Success is self-reinforcing, but it does not last forever. Indeed, even as I write these words, the West’s press is full of speculation that Google may be about to go into decline. The most popular video on YouTube today is rarely the most popular tomorrow. The song which is at number 1 this week does not usually stay very long in this position. Over the entire period from 1952 to 2006, no fewer than 29,056 songs appeared in the Top 100 chart in the UK. Of these, 5,141 were in the chart for just a single week. Almost exactly a half stayed in for less than a month, so four weeks was the typical life span, as it were, of a song in the Top 100. In contrast, fifty-nine remained popular for more than six months. The typical life span at number 1 was just two weeks.
Any other example?
At the other extreme is the ranking of the world’s largest cities. Mike Batty, a distinguished spatial geographer at University College London, published an analysis of this in Nature in 2005. He begins his work with the largest US cities from 1790 to 2000. Over the 210-year period, 266 cities were at some stage in the top hundred. From 1840, when the number of cities first reached one hundred, only twenty-one remain in the top hundred of 2000. On average, it takes 105 years for 50 per cent of cities to appear or disappear from the top hundred, whilst the average change in rank order for a typical city in each ten-year period is seven ranks.
How important is the element of chance and randomness in any successful enterprise or outcome?
In a world where network effects, where positive linking exists, chance and randomness are important. A lucky early break sets up positive feedback. Once you or your product have been selected, it makes it more likely that you will be chosen again in future. It is easy to see now, for example, why Manchester United are so successful. They possess global brand recognition and can attract massive sponsorship. But this was not always the case. Chance played a big role in their very survival, and in their subsequent success.
How was that?
Manchester United started life as essentially the works team of the Lancashire and Yorkshire Railway company, based in – and called – Newton Heath, then as now a poor district in the eastern part of the city. Just over 100 years ago, Newton Heath were served with a winding-up order. A consortium of local businessmen paid what in today’s money is around £750,000 to rescue the club, and changed its name to Manchester United. Despite some fleeting success, the club languished. In 1931 they were effectively bankrupt again and were rescued even more cheaply than before: for some £400,000 in today’s money. Yet in 2011, the value of Manchester United is of the order of £1 billion!
And chance had a role to play in it?
Chance elements also played a role in United’s subsequent success. Just before the end of the Second World War, the club offered the position of manager to Matt Busby, a man who built not one, not two, but three extremely successful teams during the course of his career. But Busby’s appointment itself was to a considerable degree one of chance. Thirty miles to the west of Manchester lies its great rival, the city of Liverpool. The antipathy between Manchester United and Liverpool FC, the second most successful English team ever, is intense. No player has been transferred directly between the two since 1964. Yet Busby almost joined Liverpool, who had been courting him for some time. The clincher appears to have been that Busby was friendly with a member of the United board through their membership of the Manchester Catholic Sportsman’s Club.
The interview originally appeared in the Daily News and Analysis on October 29,2012. http://www.dnaindia.com/money/interview_chance-played-a-big-role-in-the-success-of-manchester-united_1757253
(Vivek Kaul is a writer. He can be reached at [email protected])
This year’s top video on YouTube has been Gangnam Style, a South Korean song which has taken the world by storm. And as happens with anything that becomes successful people have started to look for reasons behind its success. The song has been labeled the crossover from the East to the West something that took actor Jackie Chan three decades to achieve.
One article looking into the success of the song pointed out “Yet, its rise to universality is no fluke. Its success occurs when the world is shifting in radical ways, at a time when individuals, empowered by the information technology, can change world history”.
The problem with this argument is that the same information technology was available to other songs and artists. Take the case of the home grown Kolaveri Di which took India by storm early this year. Like Gangnam Style the song had been put up on YouTube and it was trending within days of its upload. But its popularity never spread beyond India and Indians. How do you explain that? If information technology was the only criteria then Kolaveri Di should have been as big a hit as Gangnam Style, perhaps even bigger given that a sufficient number of Indians live in all corners of the globe.
So what is happening here? As Paul Ormerod explains in his new book Positive Linking – How Networks Can Revolutionise the World “As usual, we could in principle always tell a story after the event which purports to the account for the much further greater popularity of one video compared to another.” What this basically means is that it is easy to rationalise success by spinning a story around it once it has happened. But that doesn’t mean that those were the reasons for the success. Like the success of Kolaveri Di was attributed to its KISS (keep it simple stupid) strategy.
But the point is if identifying success was so easy we would all be doing it. Michael Mauboussin has a very interesting example in his soon to be released book The Success Equation – Untangling Skill and Luck in Business, Sports and Investing. Llyod Braun, Chairman of ABC Entertainment Group had proposed a show called Lost. It was a cross between Cast Away, a movie that featured Tom Hanks stranded on a desert island, and Survivor, a reality TV show about contestants who compete with one another in the wilderness and then vote to remove members until only one person is left. “Michael Eisner, the CEO of Disney…heard the pitch and rated Loss a 2 on a scale of 1 to 10, 1 being the worst…Eisner later called the show “terrible”…Despite Eisner’s dim view of the show Lost was a smash success…Lost ran for six reasons and improved ABC’s slumping ratings and profits,” writes Mauboussin. The irony was that Braun who had proposed the show had already been fired by then.
So the history of cultural markets is full of such examples which were written off. As Duncan J Watts writes in Everything is Obvious – Once You Know the Answer “The history of cultural markets is crowded with examples of future blockbusters – Elvis, Star Wars, Seinfeld . Harry Potter, American Idol – that publishers and movie studios left for read while simultaneously betting big on total failures.”
Another great example is Slumdog Millionaire which almost did not release and went to DVD straight away. The film went onto to win eight Oscar awards. The Hangover was another such hit. Made at a low budget of $35million, the movie went onto earn close to $468million. Closer to home critics wrote of Sholay as dead ember and Hum Aapke Hain Koun as an extended wedding video. We all know what happened there. And since then scores of Hindi movies which are versions of these two movies have been made.
JK Rowling’s Harry Potter and the Philosopher’s Stone was rejected by 12 publishers till Bloomsbury agreed to publish it. The first print run of the book was 1000 copies. Once the book was a super-hit it was deemed as a phenomenon waiting to happen. Michael Maouboussin explains this tendency in a research paper titled Was Harry Potter Inevitable? “Our society often associates success with quality. In a fiercely competitive market, the thinking goes, only the best products rise to the surface. Once a product is a hit, whether a blockbuster movie or a bestselling book, we readily point to the attributes that make it so appealing,” he writes.
Maouboussin gives a more detailed explanation for the phenomenon in his new book. “If you are like me, you have a hard time accepting that there isn’t just a little special about The Da Vinci Code, Titanic, or the Mona Lisa. The very fact that they are so wildly popular seems to be all the evidence you need to conclude that they have some special qualities that makes them stand above all the rest. But all three were surprises. Our minds are expert at wiping out surprises and creating order, and order dictates that these products are special.”
Hence, the reasons highlighted have nothing to do with the success, typically. People like the product (be it a book, a song or a movie) initially and once the product becomes slightly popular they tend to become more popular because they are popular. This is referred to as the Matthew Effect after a verse in the Gospel of Matthew “For whosever hath, to him shall be given, and he shall have more abundance.”
But that clearly doesn’t stop people from coming up with more and more explanations for success. As Watt puts it “In the end, the only honest explanation may be the one given by the publisher of Lynne Truss’s surprise bestseller, Eats, Shoots and Leaves, who, when asked to explain its success, replied that “it sold because lots of people bought it.” Similarly Gangnam Style worked because a lot of people heard it. Its success was a total ‘fluke’.
The article originally appeared in the Daily News and Analysis dated October 22, 2012. http://www.dnaindia.com/money/report_whys-the-world-going-gaga-over-gangnam-style_1754813
(Vivek Kaul is a writer and he can be reached at [email protected])
On a recent visit to a refurbished supermarket I was surprised to see a bakery right at its entrance. What it clearly told me that Indian retail was finally catching up with its global counterparts when it comes to marketing. Now you might like to believe that having a bakery as a part of a supermarket is a perfectly natural thing. But there is more to it than what meets the eye.
So why do most modern supermarkets have bakeries right at their entrances? Martin Lindstrom has the answer in his book Buyology – How Everything We Believe About Why We Buy is Wrong. As he writes “Not only does the fragrance of just-baked bread signal freshness and evoke powerful feelings of comfort and domesticity, but store managers know that when aroma of baking bread or doughnuts assails your nose you’ll get hungry – to the point where you just may discard your shopping list and start picking up food you hadn’t planned on buying. Install a bakery, and sales of bread, butter, and jam are mostly guaranteed to increase. In fact, the whiff of baking bread has proven a profitable exercise in increasing sales across most product lines.”
In fact Lindstrom even points out that some Northern European supermarkets don’t even bother with setting up bakeries they just pump artificial fresh-baked bread smell straight into the store aisles from their ceiling vents. In some cases a florist shop or a cookie store comes into play. “Smell and sound are substantially more potent than anyone had even dreamed of…All of our other senses, you think before you respond, but with scent, your brain responds before you think,” writes Lindstrom.
Music also has a role to play in this. Ever wondered why supermarkets generally tend to play soothing music? This is to slow down the consumer so that he takes time to look around the items in the supermarket.
And this is not the only trick that supermarkets malls and companies use to get you to buy more than what you may need and even things you may not need.
Another favoured trick is to offer something extra free rather than pass on an equivalent decrease in price to the consumer. Now this sounds a little complicated so let me explain this through an example that Akshay R Rao, a marketing professor atthe Carlson School of Management, University of Minnesota in the United States, discussed with me in a recent interview.
“Imagine that I am selling coffee beans, and I offer you 100 beans for Rs. 100 on a normal day. Then, one day, I offer you a 33% discount, so you receive 100 beans for Rs. 67. On another day, I offer you 50% extra (or free). You now get 150 beans for Rs. 100. But, I impose no limit on how many or how few coffee beans you can buy, on either day. So, on the day in which I offer 50% extra, you could quite easily have bought 100 beans for Rs. 67! Yet, most people prefer 50% more to a 33% lower price, even though the two options are economically equivalent,” said Rao. (You can read the complete interview here)
This inability of the consumers to distinguish between the options is exploited by businesses. Bookstores often resort to this trick. As Paul Ormerod writes in Positive Linking –How Networks Can Revolutionise the World “Marketers observed…that discounts offers such as ‘buy one, get one free’ or ‘three for the price of the two’ – a concept I am very keen on because this is how bookstores often package up their offers – tend to be more effective is boosting sales than the exact equivalent price reduction on a single purchase. The amount of money which is paid for the bundle of products is identical in each case, but more will usually be bought if they are packaged under an offer than if there is a simple equivalent reduction in the individual prices.”
Another trick used to great effect by retailers is contrast effect. It has been put to great use by retailers as well to increase the attractiveness of certain products. A 1992 research paper written by Itamar Simonson and Amos Tversky, shows this through an example of a retailer who was selling a bread making machine. The machine was priced at $275. In the days to come the company also started selling a similar but larger bread making machine. The sales of this new machine were very low. But a very interesting thing happened. The sales of the $275 machine more or less doubled. As an article on the website of the Harvard Law School points out “Apparently, the $275 model didn’t seem like a bargain until it was sitting next to the $429 model.” (You can read the complete article here)
This is a trick used by retailers all over the world to great effect. By displaying two largely similar but differently priced products, the sales of the product with the lower price can be increased significantly by making it look like a bargain.
Retailers often use this trick to promote their own brands by placing their own cheaper products against more expensively priced other brands. Tim Harford points this out in his book The Undercover Economist– “In Dalston, Sainsbury’s (a big retailer) own brand of fresh chilled juice was sitting next to the Tropicana at about half the price., and the concentrated juice was almost six times cheaper than the Tropicana.”
You would be surprised to know that malls and supermarkets are even built in a way so as to encourage people to shop more. In a multi floor store, typically the women’s apparels are on the first or the second floor. This is because women are likely to go the extra distance to shop for something than men. Also, a lot of things that can be bought instinctively and do not require much thought are placed near the payment counter so that people can almost pick them up mindlessly while making the payment.
In fact the reason why most food courts are on the top floor of the mall is because the retailers want you to buy more and pick up things you hadn’t planned to. This is done by ensuring that in order to reach the food court you have to go through the length and the breadth of the mall and in the process you might pick up something along the way. The smarter individuals might just take the lift to the food court. But then once a person reaches a mall the tendency is to loiter around for a while. This also explains why there are multiple escalators in a big retail store or a mall. This is done to ensure that once you are in the mall you go through a large part of it.
Supermarkets use the same logic and ensure that essential items like wheat, rice and vegetables are placed inwards in the store. This is to ensure you to go through the entire store and thus increase your chances of picking up something you hadn’t planned to. The next time you are at a big supermarket try buying an essential item like milk and see the sections that you pass by the time you have found the essential you are looking to buy. Chances are you might find chocolates and other junk food along the way.
Supermarket shelves are also strategically planned. The more expensive items are typically around the middle shelves to ensure that they are at the eye height of the consumer. The cheaper products are rather right at the top or at the bottom. This ensures that a consumer might just be lazy and buy the expensive product. There is also a psychological aspect at play. The supermarket by placing the expensive products in the middle is trying to project it as a quality product in comparison to the ones placed in the top or the bottom shelf.
So the next time you are at a supermarket or a mall be aware of these tricks and don’t get caught in the trap of buying things you did not plan to in the first place.
The article was originally published on www.firstpost.com on September 28,2012. http://www.firstpost.com/business/call-of-the-mall-tricks-they-use-to-make-you-spend-more-472689.html
Vivek Kaul is a writer. He can be reached at [email protected]