Three Month Summary

This course has exposed me to the burgeoning field of behavioral economics. Neoclassical economics may be the “study of resource allocation under scarcity,” but behavioral economics is a blend of economics and psychology—the study of how people actually make decisions. Neoclassical models necessarily make simplifying assumptions, and behavioral economics explains the glitches and phenomena that traditional theory excludes. Laboratory experiments in both psychology and economics departments have demonstrated that while the rational consumer is a useful construct, he is ultimately fictitious.

As Clay Shirky shows in Cognitive Surplus, and as Chris Anderson to a lesser degree demonstrates in Free, people often behave in ways that are not profit-maximizing. The traditional foil to neoclassical theory is the ultimatum game: responders will turn down free money if they believe they are receiving an unfair deal. And, as William Poundstone explains in Priceless, decision-making can be influenced by hormones, blood alcohol content, race, gender, and other human variables. Poundstone’s conclusions are not new; economists have been modeling these effects for decades.

What is new is the Internet. Never before has such a market existed, and never before has it been so easily to collect data and study social groups. The Internet is unique in several ways. Firstly, there is virtually no cost to starting an online business—there are zero barriers to entry and exit. Secondly, the Internet allows information to flow phenomenally fast, thereby eliminating information asymmetries. Likewise, it distorts geography and time: individuals across the globe can communicate in real-time, and a researcher can access decades-old news articles with a quick Google search. The Internet is a nearly perfectly competitive market. The prices of goods fall to little more than their costs of production and, at first glance, there seems to be little room for profit.

The Internet’s effect is similar to that of the Industrial Revolution. Today, companies centuries old are failing while start-ups are thriving. The Internet era demands new business models. Michael Porter’s cost-leadership strategy is no longer enough; firms will have to differentiate themselves by adding value for their customers. (One way to do this, Daniel Pink suggests, is by focusing on design and those creative, human touches that cannot be replicated by software.)

The Internet also promotes super-monetary economies. With a glut of entertainment options available, a consumer’s scarcest resources are his or her time and attention. When one’s material needs have been mostly satisfied, he moves up Maslov’s hierarchy of needs. People log onto the Internet to participate, to connect with like-minded individuals. They express themselves in art, writing, and video—they will create for free—in exchange only for an audience. Furthermore, as Clay Shirky points out, people will often take on challenging tasks simply in order to master them or to feel autonomous. On the Internet, success is measured not in dollar signs but in reputation, and the primary currency is that of attribution—giving credit where credit is due.

There are several implications for aspiring managers. Daniel Pink argues that Peter Drucker’s “knowledge worker” has been supplanted by the right- and left-brained “conceptual worker.” While this may be more prediction than perception, it is not unrealistic to suggest that tomorrow’s workers will have to communicate as much as they quantify. The physical workplace is less important than the worker himself; tomorrow’s organizations will be decentralized and office hierarchies will be more fluid. Social media will both unite offices and keep them in touch with the outside world. (For a guide to becoming the ultimate mobile warrior, read Timothy Ferriss’s 4-Hour Workweek; to become a social media expert, read anything by David Meerman Scott.) Finally, in a hyper-connected world, workers will be challenged simply to define their work, to sort out critical information from what is superfluous, and to stay focused. Workers should embrace iterative design theory: “nothing will ever be perfect,” writes David Meerman Scott, suggesting that companies should launch products as soon as possible and revise them later, with user feedback. Managers may need to teach their employees how to work as much as give them orders—a copy of David Allen’s Making It All Work should suffice.