Professor of Practice of Behavioral Economics
Steve Shu here. OK. I took a little liberty with the title of this post as my wife is away for an extended period teaching in France at the business school at INSEAD, and she asked me to help her post the next blog entry in a series of posts on marketing. As some may recall, these posts are based on a talk she gave to the PR firm, The Richards Group.
The Richards Group represents a number of well-known clients such as
AIM Investments, Comcast, Corona Beer, Fruit of the Loom, The Home
Depot, M.D. Anderson Cancer Center, Nortel, and Sub-Zero Freezer
Company.
Here’s what has been covered so far in this series on marketing:
Now we have a post on bondage and putting on the handcuffs for corporate and organizational benefits … well, you decide what the title should be. I don’t think I’m too far off though.
Steve Shu (for Suzanne Shu)
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My previous comments focused on marketing trends toward
increased choice for consumers, and the possible negative side effects of all
that increased choice. One side effect, documented by Barry Schwartz and
others, is that too much choice can be overwhelming for consumers. Dealing with
so many options requires that we know what we like, or that we can get fast
feedback from the choices so that we can refine our future selections
accordingly. The other negative side effect of increased choice is increased temptation.
Having a bigger selection of chocolate pastries at the buffet’s dessert bar
always means that I’ll end up eating more dessert than I intended to. To deal
with these temptations, we often impose self-control rules to limit our
behavior. I’ve learned to limit myself to a single visit to the dessert bar for
a single choice, no matter how tempting the rest of the selection is. (An even
better option is to send Steve on my behalf, so I don’t have to see everything
I’m missing out on!)
As a marketing professor, I’m intrigued by companies that
have found creative ways to help us avoid temptation. These companies actually
make a profit by helping us restrict out own choices. Note that I’m not talking
about the simple approach taken often by credit card companies and banks, which
has been to just depict consumers with self-control problems in their ads. This
style of advertising recognizes the problem but leaves it to the customer to
actively decide how to tackle it. It also implies that exerting self-control
requires a lot of hard work, not necessarily a message that customers want to
hear. The best solutions are more clever and subtle, and (I think) more
successful at helping consumers constrain their own choices. Several years ago,
a couple of decision-making researchers investigated movie selections made in
rental stores and at theaters. While many movie watchers expressed good
intentions for watching serious, Oscar-worthy films (like Saving Private Ryan),
they often gave into last minute desires to switch to more entertaining
blockbuster comedies and action flicks. The researchers suggest that this is
why many serious movies are released in single-screen theaters, where last
minute temptations are constrained. A more recent example involves cell-phone users
making drunken late-night phone calls to ex-lovers or bosses. Cellphone
companies now offer customers, for a price, the opportunity to block outgoing
calls to specific numbers before they start hitting the bars. In other words,
they are offering their customers a way to limit their own future choices.
The result is a difficult balancing act. Consumers want
choice and control, but they also realize they have self-control problems. And
yet they also do not want to hand over control to someone else. Instead, what
they really want is a way to control their own self-control problems – rather
than having an external provider restrict their choices, they want to be the
ones setting their own restrictions.
Let’s return to the retirement savings problem to see how
such a solution might work. SMU, where I work, has decided on behalf of its
employees that too many of us lack the self-control needed to put money aside
for retirement, so 401k deductions are mandatory for everyone over age 35. But
is forced saving the only answer? A more clever solution, now being used by
many companies with the help of 401k plans like Vanguard, is a program called
Save More Tomorrow. Their program recognizes that many individuals know they’re
not saving as much as they should, but that it’s also painful to increase
savings immediately. So employees are encouraged to pre-commit to future
savings increases timed to start simultaneously with their next raise. The
results from implementing this program have been dramatic in terms of increased
savings rates for employers who have adopted the plan; average savings in some
companies has increased from under 3% per year to over 10%. Again, the key is
that individuals realize that they have self-control problems, and the solution
allows them to restrain their own
future options, rather then imposing restrictions upon them from an external
source.
Suzanne Shu
Entertaining read that I was made aware of via Seth Godin’s blog. When considering whether to blog (or to do anything that has consequences for that matter) it is important to look for both confirming evidence and disconfirming evidence that supports your hypothesis or position. This post takes a look at the other side of the coin.
Anyway, here’s my two favorites segments of the post:
No, it doesn’t, it just makes you look like a dork …
Balderdash. Bloggers are not necessarily better-informed. They might
be more focused or be the first to publish the facts, but they are too
often ignorant of the wider picture (no matter what the subject matter)
or the consequences of writing what they do…
Post title inspired by the band The Police.
S.O.S. – an international distress signal.
Two posts (here and here) over at Jeff Nolan’s site (regarding a speculated hedge investment holding by TCV) prompted me to write a more general post on venture capital portfolios.
To set some groundwork, I think about investments in two ways: 1) individual investment and 2) portfolios of investments.
From a typical entrepreneur’s vantage point, the entrepreneur seems to be mostly sensitized to the former aspect of investment theory. How so? Early-stage entrepreneurs tend to be more schooled in answering VC questions about prospective investments in their company in isolation of the rest of the world. The "investment-in-isolation" perspective tends to address three base areas that concern VCs:
On the other hand, one core aspect of portfolio theory basically goes along the lines of this: one cannot look at an investment in isolation. Any investment in a particular security needs to be looked at in the context of other investments. An example commonly used in business school is the concept of house insurance. This type of insurance is basically a near-perfect hedge investment. That is, the value of one investment (e.g., the insurance) only goes up if the other one goes down (e.g., the house burns down). Some business schools also introduce the concepts of vector analysis and hedging where underlying factors are not necessarily so orthogonal in their outcomes (as is the case of the simple house insurance case).
Other aspects of portfolio theory include minimizing idiosyncratic risk through diversification (much like index funds do by investing in a large number of investments which VC funds cannot do to the same extent).
Blogs by venture capitalists have done a good job to date of shedding light on things like the mechanics of terms sheets, how individual investments are evaluated, how board relationships work, where innovative sales models are going, etc., but I have seen very little to date on how portfolio theory ties in from various angles. This is not to say that portfolio theory does not apply – perhaps it has just not been addressed widely, it is less transparent, or it is not as sexy. Business schools tend to characterize venture capital firms as never investing in competitive firms (overlapping investments for both legal and portfolio reasons) and never facilitating operational measures that intensify idiosyncratic risk. Synergies between venture portfolio companies tends to be a subject that is not addressed in business schools.
Two areas where this affects the entrepreneur are:
In any case, it is my impression that many entrepreneurs are less sensitive to venture capitalists’ needs as investors and as portfolio fund managers. Some entrepreneurs tend to look at VCs as either vulture capitalists or white knights only.
As a final digression, I find it interesting that in TCV’s note in Jeff’s second post, that TCV made mention of board participation in one company and absence of board participation in the other. I suppose this was intended to highlight that TCV has no conflict of interest at the Board-level as far as synergies go (whether existing or not) between the portfolio companies.
Update (3/15/05): I missed this post from Silicon Beat on the Technology Crossover Ventures (TCV) subject.
Update (3/18/05): More updates on the TCV thing. Is the story getting worse?
Steve Shu
Dave Sifry has got a great post on the state of the blogosphere. Very noteworthy is an interesting discussion on the emergence of spam blogs.
What is not shocking to me is the exponential-type growth of the number of blogs, where the number of blogs appears to double every five months. Some in the blogosphere have noted potential artifacts in the measurement process. Perhaps so. Probably so. But hey, I’m not sure where one can get better data at this stage of the game.
What is more perplexing to me is the closer to linear daily page view growth that I see via Alexa for TypePad (one of the blog platform market leaders). Would be interesting to normalize # of page views by # of active blogs.
I am looking forward to Dave’s upcoming post on posting volume for blogs. Although this is separate from page view growth, maybe this will help me to reconcile in my mind where the overall blogging market is going and who is going to get squeezed.
Update (3/15/05): Dave has new post on posting volume. Posting volume looks closer to linear to me. Whew!
Steve Shu
Continue reading “Exponential Growth in Blogs But More Linear Growth in Page Views?”
Seth Godin (Stanford MBA, bestselling author, entrepreneur and also evangelist in my book [see my side links]) is trash talking the MBA degree, and it’s quite entertaining. What I find hilarious is his comment (emphasis added by me):
An MBA has become a two-part time machine. First, the students are
taught everything they need to know to manage a company from 1990, and
second, they are taken out of the real world for two years while the
rest of us race as fast as we possibly can.
Now as a Chicago MBA, I’ve hinted (with some tongue in cheek too), that there are ways my clients can bypass the MBA.
That said, I feel that I really should come to the defense of the MBA degree because it has become the butt of many jokes of bloggers and professionals I respect like Om Malik and Jeff Nolan (not to mention Seth).
For those that are considering the degree seriously, off the top of my head there are some areas of the MBA that are harder to bypass via book reading:
Taking courses in these areas is generally much more complementary to both real-world experience and book reading than other subjects in the MBA program (IMHO). My mention of negotiations may be a bit of a surprising one, but negotiations may be one of the most underrated subjects in business schools. I can think of no other setting where you will have the opportunity to participate in controlled negotiations settings where you can find out your score and ability to negotiate in different situations. Many of the negotiation cases are built on game theory foundations, and there are measurably right answers, less right answers, and wrong answers. Anyway, if you want to bypass the MBA degree, consider taking courses in these areas (for example, I know a number of experienced execs that would feel more comfortable if they had more formal training in finance).
I think that it also noteworthy to mention that most people don’t realize that many of the people who want to get an MBA want to switch careers. While it is debatable whether you need this type of degree for management consulting or investment banking from an actual skillset point of view (beyond just having the stamp of approval), many will have an easier time switching jobs with an MBA stamp as opposed to marketing oneself as having read 30-40 books.
Other things I’m only going to mention briefly are the importance of alumni networks and having additional confidence, endurance, and resolve on the job. Places like Harvard are known to be boot camps and the West Point of business schools. There’s a lot said for practicing in the gym so to speak and defending business positions unto death in the classroom.
Now the MBA isn’t for everyone. I’ve also hinted that there are some areas where you can bypass the degree. I’ve also been known to say that the MBA is no substitute for real work experience. But I’m a tad softer on this issue than Seth.
Update (3/15/05): Based on comment from Jeff, I want to clarify the commentary I made about Om, Jeff, and Seth above with respect to ragging on the MBA. In my haste to post, I should not have pointed at them specifically. To go further, I may have characterized their stance on the MBA inaccurately, and I am glad that Jeff clarifies below. The MBA is under a bit of heat as of late as I indicated in a prior post (here another Economist article I missed as well). Seems like little defense for the MBA degree has been put up to date (which is the real reason for my post).
Steve Shu
Link to a friend in need. But do we know what we are talking about here in terms of demographics?
And I thought tea leaf reading was hard. Anyway, since metablogging is not cool anymore … that’s all.
(*) Some people cited in this MSNBC article talk about highlighting minorities in
need of having their voices better heard. Given that blogging is turning out to be a new communications medium, I suppose the concerns are valid, but it does feel a little weird on first blush.