What I have been reading

Devil Take the Hindmost. A brilliant exposé on the nature of speculation and the human tendency to occassionally go mad. Edward Chancellor’s book is about the financial markets, but I’ve always believed that studying other realms of knowledge brings greater understanding of one’s own area of expertise — often better insight than reading blogs and books published within your field.

So, what insight does Devil Take the Hindmost offer the marketer? We’ve been told that markets are efficient and that crowds are wise. If you haven’t heard these concepts, then consider the following: why else would we place so much value in websites that encourage community tagging of content, search engines that rank sites based on the number of links from related websites, and markets that try to predict future events based on user voting? The Efficient Market Hypothesis (to borrow the term from economists) and the wisdom of crowds are two fundamental assumptions underlying Web2.0 and all those budding social networks, predictive markets, pageranking systems, peer-to-peer sharing communities, and user-produced content on the internet. We can debate about how these ideas from the economics and financial world came to be the premises of today’s internet, but suffice it to say that Web2.0 is not the only realm affected. Modern business, with its emphasis on shareholder value, its reliance on the capital asset pricing model, and its focus on stock-option compensation, is also predicated on efficient markets.

But, are markets really efficient or do markets move according some other, less well understood factors? Are crowds really wise or do they exhibit the same failings and irrational choices of individuals? Devil Take the Hindmost, not unlike Nicholas Taleb’s The Black Swan, takes a hard-hitting swing at the ideas of efficient markets and the wisdom of crowds. Chancellor provides us with a wealth of historical examples from ancient history to modern times (but pre-dotcom era) where the markets have bubbled and crowds have gone a bit ga-ga, throwing out all rationality in the blind pursuit of profits. Such things clearly shouldn’t occur in a truly efficient market, a fact that has not been lost on a few speculators who make their living exploiting the herd reactions of the crowd and the betting on uncertainty. Apply this same experience to the internet sector, where the wisdom of the crowd (usually referred to as the “user community”) is an article of faith, and you being to wonder if certain business models are built on a house of cards.

What I have been reading

Web Rankings Shakeup: It’s About Time. A fascinating article from Business Week concerning the latest fad in website metrics. In short: pageviews are out, time spent on site is in. Strangely absent from the heated conversation about web rankings is the utter futility of trying to capture a website’s value in one metric. It is part of our nature to oversimplify things, especially coming up with a more realistic view of website relevance would require grappling with so many complicated factors. Nicholas Taleb would cite the whole rankings shamble as an example of Platonicity. Of course, big bucks are riding on this game, this battle for the ultimate metric. The winners can expect a lion’s share of advertising revenues; the losers will see their perceived importance and their market share wither. Of course, a few insightful marketers will recognize that value is highly relative and ignore the lure of a single metric view of the world. They may find that advertising on “out of favor” websites will actually bring them better results at a lower price tag than the top-of-the-charts websites.

The Black Swan. Nicholas Taleb’s book on the impact of the highly improbable is an essential read for anyone in the analytics industry. Web analysts live in a world of numbers and many practitioners are trained in statistics, econometrics, or mathematics. Taleb challenges the conventional wisdom and many of the basic assumptions which underlie the modern science of analysis. If your universe revolves around concepts like variance, standard deviation, correlation, R square, Bell curves, and forecasting than prepare for a disconcerting revelation: “It is the world that has been pulled over your eyes to blind you.” I’ve always been extremely suspicious of forecasting and those who purport to predict the future. The Black Swan has finally provided me with a plausible explanation for this personal bias. Opps, was that just an example of Confirmation Error?