Lock-In at Silicon Valley

Bill Davidow from The Atlantic has a great post on the new business model that defines many giants in Silicon Valley:

Facebook is a perfect example. You can spend a lot of time and energy learning the ins and outs of the site, and building your image on the site by posting pictures, videos, and messages. You spend a lot of time getting friends to pay attention to you, and you in turn spend a lot of time keeping track of them. If you leave Facebook, you leave both your virtual friends and your investment in the site behind.

The so called "lock-in" strategy that is pursued by Google, Twitter, Facebook, and others, is building an internet consumer culture that is limited by choice, and punished for pursuing other outlets.

You definitely see this happening in a number of places. Davidow points out that when it comes to listening to music - Apple blocks you in with it's technology (iPhones, iPads, iPods) and its software (iTunes).

But I think when it comes to social networking sites - something more is happening than an effective business strategy.

Let's look at Google+ and Facebook.

I wouldn't argue that the failure of Google+ is because of policies by Facebook. Google+ wasn't super successful because of the very nature of social media sites. Consumers want to tap into their network of friends, and the tighter and more interconnected their network is, the better. That's how Facebook beat out MySpace in the first place. We have a whole generation of people (of which I'm included) who literally can't be on the computer for more than 10 minutes without checking Facebook. And you know why? Because it's the closest thing we having to being a room with all your friends. You have a birds eye view of your entire social life That is pretty remarkable. 

It's kind of like this. I have a core group of friends. We hang out. We do things together. You get the picture. Isn't there a lock-in strategy there? It's more of a pain to explore new friends and social circles because you have to completely rebuild those friendships.

You could infer the same thing about Facebook, and other big internet companies. So why would we (as consumers) even lift a finger to look for substitutes, when it's all right there! 


I'm not saying that these companies actively pursue ways of keeping us on their websites, but it seems like a lot of the work is already done for them.  

Update on the ACA

So the ruling for the ACA won't come until Thursday (hopefully). Until then - I wanted to do a quick post on some alternatives to the individual mandate, in case the provision gets shot down while the rest of the law stays.

Thankfully, WonkBook, this morning, linked to a document by the Government Accountability Office that outlines some incentives to spur voluntary enrollment. 

Here's the list:

• Modify open enrollment periods and impose late enrollment penalties.
• Expand employers’ roles in autoenrolling and facilitating employees’ health
insurance enrollment.
• Conduct a public education and outreach campaign.
• Provide broad access to personalized assistance for health coverage
enrollment.
• Impose a tax to pay for uncompensated care.
• Allow greater variation in premium rates based on enrollee age.
• Condition the receipt of certain government services upon proof of health
insurance coverage.
• Use health insurance agents and brokers differently.
• Require or encourage credit rating agencies to use health insurance status as a factor in determining credit ratings.  

A public education and outreach campaign will have extremely limited success. I mean, come on, the Obama administration tried to have a education campaign on the ACA itself, and now everyone hates the law but loves the provisions...

Of course, if the individual mandate is knocked out, there is no way Congress will act on any of these provisions. Even if Democrats maintain a slight majority in the Senate, the desire to touch health care again will be minimal. 

Cultural misunderstanding

I wanted to comment briefly on a post by Arnold King about the lack of high-skilled labor:

Perhaps the seemingly low "supply of high-skill" (aka highly-credentialed) workers is a reflection of low demand for the lifestyle of high-skilled workers. Maybe at the margin many people would prefer more leisure to higher cash incomes.

One of the first things that we learn in econ is that you can't demand things that you don't know are in existence. I'm not responsive to price changes of Australian candybars because I don't have the opportunity to consume them (assuming I can't order them over the Internet).

The same thing can be said about "foreign lifestyles" and being aware of how other people live. As an upper middle-class, white college student, I don't have a very good understanding of what a lower class lifestyle is like. Sure, I know what it entails, but I don't truly understand it. The same can be said for other cultures when they are observing my life. So all in all, it's hard to determine if you really want or don't want another lifestyle if your understanding of it is limited to what you see out of your windshield.

Perhaps our understanding of other cultures has increased over the decades, but we also seek out others who are similar to us, so it's hard to say.

I'm not saying that King is wrong - but that perhaps cultural misunderstanding may play into this debate somehow.

Fantastic quote on evolution

Understanding the fundamentals of evolution is key because we so often get it wrong. Think of Darwin's lament. Evolution is part of our everyday parlance, and even though the game of life is a fact of life, we intentionally and unintentionally misrepresent, steadily. We think, incorrectly, that individuals evolve, that individuals act for the good of the species, that some species are primitive and others are advanced, that a ladder of life describes descent with modification, and that evolution is always working to make species better. We incorrectly intuit that complexity is always more evolutionarily advanced than simplicity, that evolution is goal driven, that evolutionary change is linear and in one direction, that any anatomical structure evolved long ago for the function it fulfills today, and that humans aren't evolving anymore - wrong, wrong, wrong!

Jon Long
"Darwin's Devices"

Of course, I first heard about this book from Tyler Cowen (hat tip). It's a fantastic study of how we can use robots to better understand minut evolutionary changes.

Very Cool Picture

Showing where tourists and locals go in the D.C. area.

Here's the link with other cities included.

The Emergence of Micro(scopic)economics

I know discussion on this topic has already gone through the blogging cycle - but I still wanted to express my fascination with it.

A couple of weeks ago, Tyler Cowen posted an article by the Boston Globe that surveys a group of economists working on a new sub-field called "genoeconomics." (The group of economists includes Edward Glaesar - one of my favorites.)

The article previews a bit of the world of genoeconomics - a new field in economics that takes a look at how genes impact certain economic traits. Pretty cool stuff, indeed.

Of course, this isn't the first time that there have been crossovers between the hard sciences and economics. At the turn of the century, neuroeconomics was starting to gain some traction, though I'm certainly not in-tune enough to gauge its success.

Either way, I would argue that genoeconomics is a pretty big frontier for economists. When I was taking my first microeconomics class, my professor emphasized that economics tried the answer the affects of how people behaved, not why they behaved that way. Well it certainly looks like that's about to change.

So why is this a good thing?

1. If you find a way to effectively measure the influence of genes (which is where 90% of the work lies) then you're making way for some very strong microfoundations from which to analyze other economic phenomenas. It's a lot harder to take an abstraction from genetics - because it's all right there. Now this doesn't mean that if we figured out every nook and cranny of the human genome, that we won't have to do any abstractions at all. I'm just saying that what pushes our behavior will be a lot more concrete than just saying "everyone is rational."

2. Just by the very fact that economists are wading into harder science is exciting - because it's making more economists think like scientists.

3. There are more possibilities for natural experiments. (Just look at twin studies.)

But at the same time, there are certainly downfalls to pursuing genoeconomics.

1. For one, you're giving social darwinism a lot of tools to work with. This is a point that is made clear in the Boston Globe article. There is definitely a fear of banks requiring DNA testing before receiving a loan, and other such discriminations.

2. Figuring out the statistical methods of genoeconomics will also be incredibly hard, and will have to take time. Because it's easy for someone to say - "Hey look, these people all have this gene, and they all are rich. Therefore, you will be rich if you have this gene." Bad science. I know that papers like these will emerge eventually, but we should be wary of them. 

Game Theory is a little too hip for Ronald Coase

An interesting quote from an interview with Ronald Coase:

Roberts: “What was your reaction to [game theory] and its influence on the study of the firm?” 

Coase: “I think the influence was wholly bad, because people developed high theoretical approaches instead of approaches based on what actually happens.”

The full interview is here.


So is he saying that the models are bad? Because I actually think game theory does a pretty neat job of showing the different choices people will make when they have incentives. In many cases, you can break down the relationships that are happening in a firm or institution.