Author: Daniel Tunkelang

In my previous posts, I discussed applying Mankiw’s Brief Principles of Macroeconomics to the attention economy 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 works as a whole.

5. Trade Can Make Everyone Better Off.

Trade unifies the information and attention markets, since information and attention are often the commodities being traded. While these commodities can be monetized, they are more often traded as is, especially in the online markets.

In the online world, the market for trading information and attention is the link economy. Links are themselves a form of information, but more importantly they serve to promote other information. In the early days of the web, that promotion had a straightforward effect: a link offered the possibility that a browsing user would click on it and thereby consume the linked content.

Today, however, links serve an even more important role: link analysis are the main basis used by web search engines to determine the authority of a web page, which in turn is a major factor in determining whether and how prominently that page appears in search results. Indeed, a key aspect of web search is the arms race between search engines and “black hat” search engine optimization (SEO) experts who try to game the ranking algorithms by link spamming.

Despite the fraud, however, the link economy is a critical mechanism for creating value. As many people have pointed out, the best sites are designed to give users the information they want, even if that means directing users to other sites. This enlightened altruism earns users’ trust and loyalty. Sites also develop trust relationships with one another, formally or informally cooperating to satisfy complementary information needs.

6. Markets Are Usually a Good Way to Organize Economic Activity.

It’s hard to imagine an alternative to a market economy for information and attention (at least in the free world), but central planning is often a matter of degree. Governments may restrict what information is published or who can access it, and governments may themselves act as information producers and consumers.

While the broad freedom to publish and consume information is so taken for granted in modern democracies, one might ask if this free-for-all leads to the efficient allocation of information and attention resources. In fact, the massive duplication of online content and the prevalence of spam might suggest inefficiencies in the present allocation.

Nonetheless, it’s hard to imagine that we’d do better with central planning. In countries where governments attempt to tightly control the flow of information, citizens often manage to work around those controls, and the trend seems to be towards loosening control of information, e.g., in China. Indeed, information and attention markets may be the poster child for the effectiveness of free markets in general.

7. Governments Can Sometimes Improve Market Outcomes.

While central planning is generally a bad idea, governments can and do help information markets in at least two ways: providing infrastructure and regulating against monopolies.

One of the most dramatic examples of government creating value through infrastructure is the Internet itself. It is impossible to imagine any single information producer making the investment in such an ambitious and far-sighted project. Yet the Internet has created enormous value for both information producers and consumers.

Government also serves a key role in regulating against monopolies. Much of the historical concern about Microsoft and the more recent concern about Google reflects the critical role these companies play in routing information consumers to information producers. Government intervention–or, more importantly, the threat of government intervention–helps ensure that no one will exert and abuse monopolistic control over this market.

To sum up: information and attention create a global economy and thus are subject to the market dynamics familiar to such economies. As with other economies, the invisible hand usually knows best, but at times it is necessary for governments to make far-sighted investments or prevent abuse.

In the next and final post in this series, I’ll consider the set of Mankiw’s principles on how people interact.

Continue: The Macroeconomics of Information and Attention: How People Interact

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

I received a nice email from a reader today. As per my mantra of “when in doubt, make it public“, I thought I’d post an answer here.

Subject: Daniel, You Blog So Much…

…how do you do it? I am a regular reader of your blog, and I am amazed at the frequency of your posts. You seem to write posts faster than I can think of topics. Every time I blog it turns into a huge time sink. You seem to succeed despite having what I assume is a demanding job and family. Do you have any tips/tricks/strategies/methodologies?

First, the constraints: job and family.

My job is demanding, though I’ve been lucky that I have an enlightened employer that sees the value in the time I spend blogging. Even though this isn’t a corporate blog–perhaps because it isn’t a corporate blog–it does help promote Endeca as a thought leader. That doesn’t mean I can prioritize blogging over other work, but it does mean I can devote an hour a day to my blog without incurring the wrath of our accountants or investors.

Family is trickier. I try not to blog between 6pm and 11pm, or during the day on weekends. I even went without blogging for a week! But there’s no question that one of the reasons I can spend so much time blogging is that my wife takes on a disproportionate share of the parenting load. If she starts blogging, we’ll have to rebalance.

Given those constraints, how do I manage the frequency? I post roughly daily, sometimes more than that. I have some topics queued up, but many of my posts are quick reactions to what I read, either on Techmeme or on other people’s blogs. Sometimes I’m lucky and someone emails me material that is great blog fodder (as is the present case); other times, I simply blog about what I’m doing.

Do I have any tips/tricks/strategies/methodologies? Read interesting stuff that other people write, and write about your reactions to it. Work on interesting problems, and talk about them when you can. Instead of writing an email or ranting to a co-worker, put those same thoughts into a blog post.

Perhaps most importantly, cultivate a passion for unsolved problems, so that the world reminds you of them at every turn. It’s the same advice I’ve heard given to researchers, only that the threshold for publishing a blog post is a lot lower than that of submitting a publication for peer review.

And it’s like Steve Jobs says: real artists ship. Blog posts aren’t the Great American Novel you spend your life perfecting. Some of the best blogs posts are reactions to current news stories. The value of timeliness is a great forcing function to make you write something good enough and publish it while the story is fresh in people’s minds.

Note: this post is cross-posted at the Panjiva blog, which discusses issues affecting the global trade community. I’ve recently joined Panjiva’s advisory board (alongside Panjiva investor and reknowned economist Larry Summers), and I’m proud to be helping this new venture transform global trade by providing an unprecedented level of transparency about the strengths and weaknesses of companies engaged in it. Learn more about Panjiva at their web site or blog.

While I’m a neophyte on matters of global trade (fortunately fellow MIT alum and Panjiva investor Larry Summers is a bit more qualified on those matters), I do know a thing or to about how people interact with information. So it’s my delight to share a short series of posts on the macroeconomics of information and attention.

In Brief Principles of Macroeconomics, Greg Mankiw lists ten principles of economics that he divides into three groups:

How People Make Decisions

• People Face Tradeoffs.
• The Cost of Something is What You Give Up to Get It.
• Rational People Think at the Margin.
• People Respond to Incentives.

How the Economy Works as A Whole

• Trade Can Make Everyone Better Off.
• Markets Are Usually a Good Way to Organize Economic Activity.
• Governments Can Sometimes Improve Market Outcomes.

How People Interact

• A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services.
• Prices Rise When the Government Prints Too Much Money.
• Society Faces a Short-Run Tradeoff Between Inflation and Unemployment.
  

Nobel Laureate Herb Simon articulated the concept of an attention economy in his 1971 article, “Designing Organizations for an Information-Rich World”:

in an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.

In the next few posts, I’ll try to apply Mankiw’s principles to Simon’s conception of an attention economy to establish a macroeconomics of information and attention.

Continue: How People Make Decisions

Today I delivered an internal presentation at Endeca entitled “What You Need To Know About Social Media” with the goal of setting a baseline of what every technologist should know about this brave new world.

As proof that I drink my own kool-aid / eat my own dog food, I’m offering it here for public consumption. I suspect that a lot of it will be familiar to readers here, but you never know. I also encourage you to re-use this presentation in your own organizations to convince skeptics that social media are not just a bunch of hype.

Enjoy!

A co-worker tipped me off to a public, non-profit service that deserves all the publicity it can get. It’s called Public.Resource.Org, run by technologist and public domain advocate Carl Malamud, and devoted to “making [U.S.] government information more accessible”.

Not sold on the value of this service yet? Consider this example of their good deeds.

Public Access to Court Electronic Records (PACER) is an electronic public access service that allows users to obtain case and docket information from Federal Appellate, District and Bankruptcy courts, and the U.S. Party/Case Index via the Internet. These documents are works of the United States government and are in the public domain. But, for reasons that have no place in a 21st century democratic government, PACER charges $0.08 / page to download copies of these records–more than most of us pay for analog photocopying!

Enter the PACER recycling program, run by Public.Resource.Org:

Just upload all your PACER Documents to our recycling bin. Click on the recycle bin and you’ll be presented with a dialogue to choose files to upload. Then, just hit the “Start Upload” button and you’ll hear the sounds of progress as your documents get reinjected into the public domain.

We’ll take the documents, look at them, and then put them onto bulk.resource.org/courts.gov/pacer for future distribution. This is a manual process and you won’t see your documents show up right away. But, over time, we hope to accumulate a significant database of PACER Documents.

They claim to have saved $9,104.08 so far. That’s hardly enough to, say, bail out the auto industry, but it’s a step in the right direction. More importantly, efforts like this instill a culture I wish we could take for granted–namely, that public government documents should be generally available to the citizenry. Like most technologists, I have a libertarian streak, and I’m the first to defend the private sector. But this is a case where the goods themselves belong to the public. No one should profit at the expense of an informed citizenry.

p.s. Perhaps this effort will interest people trying to assemble corpora for information retreival research.