Weekly Digest #8 [Network effects, Digital Marketing, Compensation, Algorithms & Leadership]
A snapshot of article summaries that we enjoyed reading ( Dec 24— Dec 29)
“A reliable way to make people believe in falsehoods is frequent repetition, because familiarity is not easily distinguished from truth. Authoritarian institutions and marketers have always known this fact.”
— Daniel Kahneman (Thinking, Fast and Slow)
Dynamics of Network Effects: Successful companies have leveraged the concept of network effects where the network becomes more useful as more people use it. Platforms and products with network effects get better as they become bigger in accruing resources to improve their product offering. However recently we see companies exhibiting network effects split their markets among multiple players as network effects are becoming more dynamic. Every platform exhibits a different type of network effect that matures and develops differently over time. In order to navigate this dynamism, one must understand three aspects of the company and how they can change going forward: 1. Value proposition 2. Users /inventory 3. Competitive ecosystem. Principles across these three factors can help in forecasting future network effects. Value proposition: not all products created are equal. Company’s network effects cannot grow forever and it can hit a slump. It’s important for founders to know what value proposition drives network effects, understand its strength and pay attention to its evolution with time. Industries like ride sharing decentralized platforms, social lending, and social media platforms are interesting examples. Facebook went from sharing status updates with friends to surfacing news and content as many users were uncomfortable with sharing personal content. Users and inventory — not all users are created equal. The type of users you are adding is fundamental to understanding the value you’ll create in the future. An important factor in projecting network effects is whether users/inventory is commoditized or differentiated. Platforms with commoditized inventory are likely to observe their network effects taper as they reach a liquidity threshold. Platforms with differentiated inventory have stronger and lasting network effects because of inventory diversity that suits customers unique preferences. During growth phase for acquiring and engaging more users, you need to pay attention to the incremental users you’re likely to attract. Need to identify whether they are network contaminants, neutrals or contributors. Adding a great content producer adds value to the network. Competition — not all markets are equal. The nature of the market along with competitors and substitutes is essential to understanding network effects. It is important to think if others have a network similar to yours as network overlap can pose a risk to your existing market. Low switching costs to competitors can weaken network effects. It’s easy to use multiple dating apps because of lower entry barriers and switching costs. Network effects are weakened when users are unable to use a single platform to accomplish their goals. High speed of product iteration, rapid network upscale and the ease with which competitors can start has changed how we extrapolate network effects. Specific factors like network overlap, increased contaminant members, etc. can dampen the sustainability of the network effect. By understanding the dynamics of modern-day network effects, founders can design platforms with deliberation rather than being tossed around to the winds of change.
Digital Marketing Trends: To keep up with the ever-changing scene, digital marketing experts need to stay in step with the evolving tech trends. Social media marketing companies work tirelessly to research consumers and what makes them engage with brands. There is a constant focus to develop new technologies or adapt to new trends, some of which are listed below. First is on Interactive Chatbots. The technology, which combines the use of text, voice and messaging to converse directly with consumers, has been used longer than virtual reality. The main reason why this technology is so successful is likely that it answers the consumers’ need for information quickly and accurately. Chatbots can also collect data about their users, which feeds into improving interaction with them. The tech not only provides a more efficient and responsive way to deal with customers; it is also more cost-effective than hiring customer relations staff. The second trend is on Voice Search. As more and more people are on the go, the use of voice search and voice commands is increasing. Voice assistants are empowering mobile users to access information online and do certain tasks like never before. To make the best use of this trend, digital marketers need to optimize content to suit the requirements of voice searches. Publish content that solves or answers consumers’ queries. It’s also important to use natural conversational language, as well as longer phrases or full sentences as keywords. This not only helps the end-user but also makes the content voice-search-friendly. The third trend is on Integrating Blockchain and AI. Blockchain Technology has allowed marketers to track where their ads are placed and ensure that real consumers, rather than bots, are clicking on their ads. This makes customer engagement data more reliable and makes sure brands’ marketing assets are not being put to waste. Consumers can also benefit from the transparent nature of blockchain technology, as it gives them more control over how their personal data should be used by advertisers. When consumer trust increases, the likelihood of them sharing personal information also surges. This helps marketers and companies to know them better. The fourth trend is on Influencer Marketing. In today’s world, people tend to gravitate toward experiences that are authentic and real. And potential customers are more likely to believe a real person over an advertisement about how good a certain product or brand is. This is where influencers come in. To get the most out of a business’s marketing budget, marketers should choose their influencers carefully and make sure the ambassadors they use cater to and reach the right consumers. For digital marketers to become more effective, regularly assessing and evaluating strategies should be commonplace. Taking note of the latest Digital Marketing technologies and trends will be the driving force for success.
CEO compensation: Just like the idea that there should be a minimum wage, the idea that there should be a maximum wage seems to undermine the freedom that a free market is supposed to guarantee. A factor that has contributed to economic inequality has been high levels of compensation for CEOs. Another troubling aspect has been that the compensation for corporate executives has been steadily increasing whereas real wages for everyone else has stagnated. When the company does well, everyone should get a proportional percentage of profits but they don’t. Also when a company performs poorly, the CEO’s compensation should not increase, however it does. A common reason is that there are many variables that influence a company’s performance and poor performance cannot be linked to the CEO. However, the opposite argument of not linking performance to pay when it does well is never followed. Economists believe that compensation has diminishing marginal utility. More of it has less of incentivizing effect until a point where it doesn’t incentivize the person. Hence we should not pay someone more money for not getting anything in return. The compensation of a CEO is arrived by a formula used by the compensation committee of the Board where they commission a survey to find out the range of what other CEOs are paid in other companies. Considering the political sensitivity involved, the committee might offer something in the middle of the range or at the top of the range. Majority settle for the average or slightly higher than the average. When the survey is administered next year, the average increases. Market does not bid up the price and because every committee thinks of increasing it more than average, the average keeps on increasing causing a market failure. Hence setting up a market cap on maximum wage won’t interfere with the market as there is no market functioning. There is no evidence to prove that highly paid CEOs are the best performers. It is difficult to tell who has the skill and talent to become an effective CEO. A corporation’s success depends on the contribution of many people. Setting up the upper limit is a challenge but it will improve as we accumulate more data. A good point to start could be $10 million for companies doing business in the US which would position the CEO in the top 0.01% of the US income population. For companies not doing business in the US, a limit can be calculated based on the income distribution pattern of that country. To avoid people from gaming, when companies have substantial contacts in multiple jurisdictions, the applicable limit for the cap would be adjusted to reflect the source of the company’s real economic activity. This limit will help in slowing economic inequality and prevent reckless risk-taking by CEOs to bump the stock price.
Hypocognition: Hypocognition in modern behavioral science means the lack of linguistic or cognitive representation for an object, category or idea. We wander through unknown terrains of life as novices more often than experts, complacent to what we know and oblivious to what we miss. Hypocognition is about the absence of things and it’s hard to recognize because it is invisible. Hypocognition also lies in the middle of emotional experiences that we encounter but fail to explicate. We face it when we are at loss of words to describe how we feel. No single emotional repertoire can capture the multitudes of emotional experiences that humanity has developed. Majority of Americans are hypocognitive about compound interest and how saving money can be beneficial and how debt can crush them. Hypocognition is something that we cannot fathom, an emotion we cannot grasp, a certain principle that must against our reason be unreasonable. In political battles, partisans see concepts pertaining to their own sides hypocognitive of principles of their ideological opponents. Hypocognition impoverishes our knowledge and hence the attempt to reduce it should be a delicate pursuit because going too far against it makes us vulnerable to hypercognition. Hypercognition is over applying a particular concept to circumstances where it doesn’t belong. Experts who are confined by their own expertise are likely to fall prey to hypercognition. A bias towards what is known can lead to wrong diagnoses that bring harmful consequences. Social science has catalogued numerous knowledge gaps in the human mind. Let us add hypocognition to the cognitive arsenal to live a better life and seek out the personal unknown unknowns.
Timeless Leadership Principles: Business world has changed since the days of David Ogilvy or Peter Drucker. But just because workplaces of today are more inclusive/diverse/ faster doesn’t mean that leadership principles espoused by an earlier generation of business titans don’t hold up. On the contrary, thoughts, and practices of management expert Peter Drucker, business author Dale Carnegie, advertising genius David Ogilvy and former President Theodore Roosevelt offer nuggets of wisdom that make it easier to navigate the modern workplace. We look at a few of such gems of leadership tenets. First is How Analytics Keep People Accountable. ‘What gets measured gets managed’ — This evergreen phrase coined by Peter Drucker is as relevant today in the age of Big Data as it was decades ago. If you’re interested in seeing an improvement in the workplace or in your personal life, the easiest way to drive change is by setting a measurable goal, and monitoring performance on a regular basis. The second tenet is on Admitting one’s own mistakes before others hold you accountable. ‘Any fool can try to defend his or her mistakes — and most fools do — but it raises one above the herd and gives one a feeling of nobility and exultation to admit one’s mistakes’ -This advice by Dale Carnegie offered that advice in his famous book How to Win Friends and Influence People, published more than 80 years ago. Taking ownership and explaining why the mistake could negatively impact the organization is an effective way to position yourself as a leader. Furthermore, it will make senior managers feel as though you understand the bigger picture and are capable of responsibly comporting yourself in challenging times. The third tenet is about Hiring People Who Are Smarter Than You. David Ogilvy, the founder of the prolific advertising agency by the same name, knew this when he wrote, ‘If you ever find a man who is smarter than you, hire him.’ As an entrepreneur or a manager, hiring is the single best way to build a successful business or team. To do it, you often must avoid compromising on talent even if it means waiting longer than you would have liked to fill a position. The fourth is about Leaders Must Also Be Learners. ‘As soon as any man has ceased to be able to learn, his usefulness as a teacher is at an end. When he himself can’t learn, he has reached the stage where other people can’t learn from him’. This quote line by Theodore Roosevelt talks about how effective leaders must be able to self-teach. Business will inevitably present unfamiliar new scenarios. To overcome these challenges, you must learn enough to make smart decisions and to manage those who are experts in their given fields. While the people who advocate these four leadership principles are from a different era, their advice is timeless and worth emulating.
Auditing Algorithms: Algorithmic decision making and artificial intelligence hold tremendous potential to become economic blockbusters. However, there can be many potential unforeseen problems in society on account of algorithmic decision making. As AI moves from research to real-world decision making, it moves from being a computer science challenge to a societal challenge. Data fundamentalism is the notion that huge datasets are sources to yield reliable objective truths if we can extract them using ML tools. If left unchecked, AI algorithms embedded in technologies can encode societal biases, accelerate the spread of rumors, amplify echo chambers of public opinion, hijack our attention and impair our mental wellbeing. As different companies have to disclose audited financial statements to ensure transparency in their operations for the financial markets and other stakeholders, it is important to audit algorithmic decision making to bolster trustworthiness and credibility in decision making. An algorithm auditing discipline that encourages strategic thinking, contextually informed professional judgment and scientific methods is required that integrates skepticism with social science methodology and concepts from psychology, ethics, behavioral economics etc. Algorithm auditing will raise uncomfortable questions about the nature of decisions being relied upon to be taken by the algorithm which could be answered by regulators and independent consulting experts. Algorithm auditing needs to be under the purview of a learned science profession with appropriate credentialing, standards of practice, disciplinary procedures, ethics, regulation, and professionalism. Such a system is an important part of a bigger challenge to establish reliable systems of AI governance, risk management, and control. The auditor’s task is to ensure AI systems conform to the conditions deliberated and established at a societal and governmental level. Adopting systems of governance and auditing helped ensure businesses broadly reflect social values.
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