Posted on: Tuesday 23rd of August 2011
It really is textbook stuff: when the price of something goes down, effective demand for it goes up. The ‘price’ of decision-making is now plummeting, and demand for decision-support services is soaring. There are countless historical precedents. For example:
- Within a space of ten years Henry Ford slashed the price of a car by more than 90%, he transformed a luxury market into a mass market and in doing so, ushered in the modern age of mass, industrial production.
- In 1860, it would cost the average labourer ten hours work to buy one lumen of lighting (in the form of a candle). Over the next 150 years, the price fell by over a thousand-fold. Demand for lighting soared, transforming entire lifestyles.
Today, the price of researching and making purchasing decisions is plummeting in a similar way. Think of the physical, time, and money costs of researching a product just a decade ago. You might have to go out and travel to search for, buy and read some special publications – and the information in these publications would have been limited and perhaps biased.
The costs of finding and sifting specific product information were equally high. It also involved physically travelling to a shop and inspecting each item. End to end, the process of researching a specific decision could take you hours, prompting consumers’ search for the short cuts and work arounds I talked about in my last blog.
Today, search, comparison and the peer review are revolutionising those costs.
- Google searches millions of sources of information in seconds and goes a long way to solving the problem of sifting different bits of information by letting the individual specify what’s relevant and helpful in advance.
- Comparison services streamline the task of evaluation by assembling and displaying information about key features of different products and services (such as price) in one easy-to-use format.
- Peer reviews (especially those driven by organised, disciplined processes such as Reevoo) gather and present huge amounts of second hand experience that, in previous times, would have taken weeks of work to collate.
- Expert reviews and peer-to-peer information sharing are also helping to reduce learning costs. When making a decision in unfamiliar territory, there are many questions that we don’t know the answer to, and which require further research. For example, for a newcomer, the question ‘do I want legal cover on my car insurance’ only raises further questions: ‘what could/would happen if I had an accident with/without legal cover? What sorts of accident would it be invaluable/not worth it? What are the chances of such accidents happening?’ And so on. Nowadays, specialist services like MoneySavingExpert help people ask the right answers, alert them to hidden pitfalls, steer them away from obvious or common mistakes.
A market that changes markets
What this means is that we’re in the midst of a revolution in the costs of consumer decision making. Not long ago, if Mr Jones in Scunthorpe wanted to research buying a camera he might have to spend five hours researching. At, say £20 an hour, this research would have cost him £100. Having done it, there was no way he could share his findings. So Mrs Smith in Surbiton also had to spend £100 researching the same purchase: the wheel reinvented, millions of times over.
Now, thanks to search, comparison and peer-to-peer information sharing, both Mr Jones and Mrs Smith can achieve a better outcome in minutes or even seconds. The costs of investing in a better decision have plummeted – while the benefits have increased (because more, better information is now being made available).
It’s this simple change in the underlying economics of information gathering and use that’s created the second ‘invisible’ market for decision-support services. And the implications of this market are just as profound as those of the car and lighting markets – probably even more so, because how decisions are made strikes to the very core of how markets themselves work. This, in turn, throws all those decision-making habits, short cuts and workarounds developed by consumers over the decades into the air.
Knowledge as empowerment
Parallel to this is another development. 50 years ago, the problem of human decision-making was declared solved by the economists who, a priori, simply asserted that we are ‘rational’ creatures. Then we started looking at how real people made decisions and, to our consternation and astonishment, discovered that real people and economists ‘rational economic men’ are almost exact opposites.
But how should we use these new insights? Should we deploy this new knowledge as power: used by organisations to assert even closer, more effective control over the consumer? Or as knowledge as empowerment: used to help people understand themselves and their own behaviours better?
Writing in Nudge, authors Cass Sunstein and Richard Thaler drew the only sustainable conclusion: new knowledge has to be used to help people understand themselves and to design ‘choice architectures’ (decision-making processes) “that will make choosers better off, as judged by themselves”. Otherwise, it will simply suck us into an endless, wasteful quagmire of adversarial game playing.
The control shift
It’s the combination of these two factors – the revolutionised costs of decision-making, and ongoing progress in understanding how real people actually make decisions – that’s spawning the new market for decision-support services. The two (plummeting costs and increased knowledge) go together because insights into how real people make decisions can now be used to design services that really help them do so.
Yet, as I said before, most organisations haven’t even recognised the existence of this new market, never mind adjusted to it. We therefore need to ask:
- how will this new market evolve (it’s still in its infancy), and
- what might such an adjustment look like?