Psychology and Economics of all things
An assertion — “human behavior and choices they make can be mapped to psychological and economic factors processed by them consciously or sub-consciously”. Well of course, Psychology and Economics have been the basic sciences for as long as we can remember for this very reason. Human mind processes information and creates action using complex computations. I am asserting that at the end, most of these computations can be categorized into psychological and economic factors. For different people the balance between these factors may be different, some may consider economic factors more (the realist maybe) and others the psychological factors ( the emotional ones), but at the end it is a concoction of these two type of factors which drives the choices, or decisions, human beings make in most situations.
If you agree to or at the least intrigued by this assertion, then let me take you to the next level of discussion. All situations where human beings are involved can be analyzed and handled by focusing on these basic factors. These situations could be as diverse as negotiations with extremists, complicated family discord, dealing with the first teenager in the family, and also a whole bunch of corporate situations like working with/in teams or making a pitch for a new proposal. What I am trying to get to is that a focus on these two factors can be powerful way to predict human reactions in a number of situations that corporate world cares for.
Take for example a car launch where the car maker is trying to predict the success of the car in terms of market take off. A new car with the right psychological appeal and a clear economic value would do well, of course obviously so. But often people get this wrong — take example of a car priced really really low and one would expect that this would be a great success in price conscious markets like India. But if the buyer thinks that he would be perceived as “cheap” car owner, he would prefer to spend more for a similar product or may not even buy the car if he/she cannot afford anything more expensive. So the car loses out on the psychological factors. Similarly a huge success this year is no longer selling the next year simply because everyone has it and so no “distinctiveness”, again psychological factor. Now this is what is understood and managed by advertisement companies and in branding exercises so nothing new perhaps.
My reason to write this piece is that I am from software industry and feel that somehow this concept is not applied well enough or not paid attention to enough in this industry. We are living in a fast changing and ever evolving technical world. There are new devices, new Internet services, and new applications being launched on a daily basis vying for user attention. But we know that an average user uses less than 10 applications on a daily basis and changes his/ her device once in 1 to 2 years only — meaning there is more coming out than what users can possibly consume.
If you are building a new application or as an investor looking to invest in a new idea you do not want to be left behind in this age of rapid innovation but at the same time there has to be some way to feel good about potential of success of a new product. I think that the investment discussions or start up discussions in technology sector to have far more reliance on hope / luck / throw it on the wall and see if it sticks factor / or simply put it is just a sense/opinion driven decision. Too many situations are gut call rather than a rational thesis. For this reason, investors often want to wait for “initial success” or “traction” before investing, in the process probably killing some great innovations too early. Of course this is a sweeping generalization as there are super smart people in this industry and a lot goes on before a product hits the market. But still even if one looks at only the successful ventures, it seems more of an accident than a reasonably confident plan or investment at the start.
So where i am going with this — the attempt is to remind that we probably need to apply the same psychological and economic scales to evaluate ides in software world also. The parameters themselves can be defined by individuals as their own IP or sense but these seem to be the key dimensions. Like for a new service or application the psychological factors are most of the time the simple to understand interaction model, the sleekness of experience & layouts. The economics is probably even more important — as an investor I would like to really have a measure of the economic value creation by the new offering as a primary factor for success. The larger the core sustainable economic value (distinct from any other thing in the market) larger are the chances of success. The other factors like network effect and unique IP are often sub-bullets of this aspect. Simply put after use if the user reaction is — feel good + save time / money then there is a potential business. Of course you would then need a good team to execute on the idea and there should be some unique defendable differentiation which gives sustainability against me too copies.
Another place where this can come of use is to figure out new business models for the software / service or application world. The traditional business models are breaking apart and users want everything “free” and then add funded seems to be the only recourse. Subscription models are also being experimented with but have seen limited success in consumer world. Enterprises or commercial buyers are still learning and are slower to change but will change in due course. If there is a clear articulation of the economic value creation, the creator will see economic returns flow back.
Technology industry in general has always been high pay offs industry when there is a hit. That is why so much money flows into the sector in “hope” for a success. Far too many “copy” ideas get funded in waves while at the same time a lot of great ideas die early due to inability to show early success without help — both in larger companies as well as in start up industry. This is just a small thought on the ever evolving frame of investing thinking in this wonderful game of technology sector. Thanks for reading thus far and look forward to hear your perspectives.
