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The Macroeconomics of Information and Attention: How People Make Decisions

December 17th, 2008 · 5 Comments · General

In my previous post, I discussed applying Mankiw’s Brief Principles of Macroeconomics to the attention economy postulated by Herb Simon. Let’s start with the first set of basic economic principles, which concern how people make decisions.

1. People Face Tradeoffs.

  • Information Markets
    In the 1990s, the web quickly exploded from an obscure protocol into an ocean of data, some of it even useful. Even before the Internet age, people had to allocate their scarce attention among the available media–something Herb Simon could see happening as early as 1971! Today, there is no question that reading everything–or even everything likely to be useful–isn’t a feasible option for anyone. Moreover, the tradeoff problem for information is recursive: choosing what information to consume is itself a problem that requires consume information. Simon recognized this problem and proposes bounded rationality as a model to describe our process of making decisions despite our inability to process all of the pertinent information. The result is satisficing: a decision-making strategy which aims for adequacy, rather than optimality.
  • Attention Markets
    Now let’s consider the consumers of attention–that is, information producers who would like to see as much of the collective attention consumer budget devoted to their particular information product. Such producers include retailers, publishers, politicians, et cetera. These information producers / attention consumers also face tradeoffs. Their main tool to obtain attention consumers is to their finite budgets to invest in marketing. In the online world, that means spending on advertising and search engine optimization (SEO). The trade-offs among marketing vehicles can seem almost as overwhelming as those facing information consumers, thus fostering multi-billion dollar advertising and SEO industries.

2. The Cost of Something is What You Give Up to Get It.

  • Information Markets
    Tradeoffs mean that people choose what information we consume based not only on the value of that information, but on opportunity costs. Those opportunity costs typically take two forms: money and attention. We can think of the attention cost as the cost of not being able to consume other information that might also be valuable. In a rational market, there should be a clear exchange rate between these two costs, a currency exchange to quantify what it means to say that “time is money”. But information consumers at best display limited rationality. In particular, the near-total dominance of advertising-supported information products implies a very low value on time: most people aren’t willing to spend even pennies to skip ads. As a result, most information consumers make trade-offs as if all information is free, and the only scarce commodity is their own attention.
  • Attention Markets
    Information producers also have tradeoffs to optimize. In general, they don’t consume attention for its own sake, but rather in the hopes of converting that attention into some sort of profitable action, like selling a product or obtaining a vote.Hence, retailers allocate advertising budget among they keywords they purchase as pay-per-click search engine advertisements, and politicians budget campaign funds among regions and demographic segments. The fierce competitiveness of attention markets ensures that, regardless of the total budget involved, information producers are well aware of the opportunity costs of their decisions.

3. Rational People Think at the Margin.

  • Information Markets
    There is an enormous redundancy in the information available, particularly online where the cost of distribution is practically zero. The marginal value of information to a consumer is the amount of value the consumer experiences from it, given the information he or she already has. Much of the information overload problem reflects that, even if each piece of information has significant value in absolute terms, the redundancy makes the marginal value much lower–often indistinguishable from zero. While this redundancy is part of what makes web search engines so effective, it is also a major challenge for consumers who would prefer to see the ocean of data de-duplicated.
  • Attention Markets
    The consequence of thinking at the margin is interesting for attention markets. It may be the leading factor in web search being a natural monopoly, since information consumers find little benefit from using more than one search engine. Google’s success in part reflect a desire by information consumers focus primarily on a single channel. In a related vein, marginal value also affects network externalities (aka network effects) in attention markets. For example, the pay-per-click model of web search advertising worked around the congestion of the display advertising business. Moreover, because the business model was to auction ad placement, Google experienced a positive network externality as its market share of consumers increased and advertisers raised their bids to compete for this treasure trove of attention budget.

4. People Respond to Incentives.

  • Information Markets
    As we’ve noted already, most people aren’t willing to spend even pennies for online information. While we may question the overall rationality of how people weigh money against time, there is no question that they respond to incentives. The New York Times had a painful lesson in lost readership when it tried to get users to pay for a premium TimesSelect service that included previously free (ad-supported) content; it didn’t take long for them to revert to their old model. Other information providers have had more success with “freemium” models that offer free services but try to upsell premium services for a fee. But incentives in information markets aren’t just monetary. Users abhor the attention cost of clutter–which is one of the reasons cited for Google’s triumph over Altavista. For that matter, spammers and phishers have learned to exploit “social engineering” techniques that essentially lure people with the promise of purportedly valuable information.
  • Attention Markets
    Indeed, spam is a case study in how attention consumers respond to incentives. Junk mail has been with long before the Internet, but at least the sender needed to achieve a response rate that overcame the cost of postage. The mass adoption of email made the cost of distribution essentially zero to spammers. In fact, there are price wars for spamming services, with offers as low as $80 per million emails sent. A recent study suggests that spammers achieve an average response rate of under 0.00001%., and yet the volume of spam accounts for an estimated 80% to 96.5% of overall email traffic.One of the ideas proposed to combat spam is attention bond mechanisms:

    The Attention Bond Mechanism (ABM) is a means of using sender-posted bonds to eliminate spam and facilitate mutually agreeable communication. The ABM can be applied to email and to other communications media.

    For example, if you want to send me an email message, you might post a dollar as a bond in order for the message to be delivered. As long as I am satisfied that the email is not spam, you keep your dollar. But, if I do flag the email as spam, I take the dollar as compensation for my wasted time.

To sum up: information and attention obey the same principles of supply and demand as more familiar economic goods. In the next post, I’ll consider the second set of Mankiw’s principles, which concern how the economy works as a whole.

Continue: How the Economy Works as A Whole

5 responses so far ↓

  • 1 The Macroeconomics of Information and Attention | The Noisy Channel // Dec 18, 2008 at 9:07 am

    […] The Macroeconomics of Information and Attention: How People Make Decisions | The Noisy Channel // Dec 17, 2008 at 1:51 […]

  • 2 Michael H. Goldhaber // Dec 18, 2008 at 5:22 pm

    The above analysis is extremely limited, short-sighted and thus highly inaccurate. Most would-be attention receivers — on the Net as elsewhere — seek attention for its own sake, as in blogs, comments, listservs letters to the editor and the like. So do the majority of authors and artists, etc. So do people engaged in ordinary conversations. to miss all this is to miss almost everything. (See also my comment on the previous post.) I have discussed al this in many fora, including my blog. What you describe as the “Attention Market ” is not very clearly defined nor thought out, I ma sorry to say.

  • 3 Daniel Tunkelang // Dec 18, 2008 at 6:50 pm

    Michael, tell us how you really feel! I concede that my analysis is limited. My goal was not to be exhaustive, but rather to provoke some thought through illustrative examples. Clearly I succeeded in provoking a reaction, though admittedly not quite what I expected.

    In any case, you’ve succeeded in making me curious enough to check out your blog.

  • 4 The Macroeconomics of Information and Attention: How the Economy Works as A Whole | The Noisy Channel // Dec 19, 2008 at 8:06 am

    […] postulated by Herb Simon and went through his first set of ten economic principles, which concern how people make decisions. In this post, I’ll consider the second set of principles, which concern how the economy […]

  • 5 The Macroeconomics of Information and Attention: How the Economy Works as A Whole | The Noisy Channel // Dec 19, 2008 at 8:06 am

    […] postulated by Herb Simon and went through his first set of ten economic principles, which concern how people make decisions. In this post, I’ll consider the second set of principles, which concern how the economy […]

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