Decision Making as Output and Bounded Rationality

  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra

Logic of Free Revealing of Information


Erich Von Hippel in his splendid appraisal of innovation reasoned home innovation or user driven innovation constitutes a critical yet discounted component of the innovation process.  The users as they innovate in their ‘home’ or ‘office’ environment deliver valued service to the firms. Given the heterogeneity of needs, it is difficult for a firm to produce personalized or customized goods without a trade-off on price. Therefore the biome compels the users adapt the standardized offering by tinkering with these products to suit their localized contextual needs. In doing so, they emerge as lead indicators of the demand patterns for the goods and physiognomies of the goods. In a previous piece http://stalkingtheory.blogspot.com/2020/01/output-saving-and-digital-domain.html , quoting Lancaster, it was argued that the individualities of the good rather the good itself engendered utility to the user. Therefore, it is vital for the firms to decode the user needs thus making available the relevant characteristics. Furthermore, many an occasion, the users innovating provides the lead indicator for the future development of goods and services.

Product development is a function of implied demand uncertainty and the user driven innovation answers the puzzle in a significant way. Yet in diffusing the innovation, the firms and users or amateurs adopt different pathways. Firms are close ended and seek to protect the innovation through patents, trademarks, trade dress, industrial designs, copyrights etc. At times, bundle of these Intellectual property rights are also utilized to prevent others from encroaching or erecting barriers of entry to monetize the innovation. Yet users adopt open ended approach allowing a free revealing of information.

This feature of free revealing is not just in the case of innovation. Many often engage in free revealing lot of information around the globe. In the rise of social media coupled with platforms thriving on user generated content, free revealing has seen a catalyst and thus experiencing exponential growth. The success is however a function of what Yochai Benkler might term accreditation and relevance.

Accreditation is a measure of credibility of the user and thus a tool to avoid adverse selection. The user review ratings, adopted from the paradigm of Suroweicki’s Wisdom of Crowds are one measure of analyzing accreditation. Relevance is about how the information revealed is useful in the given context.  Given the background thus provided, it is worth examining the reasons for free revealing of information

Enjoyment of process

To many, revealing the knowledge one possess is a sort of enjoyment. There is inherent pleasure at being able to address queries or clarifications of others on topics you know better relative to knowledge seekers. In the process, it is often noted, the solution giver too raises her knowledge. Knowledge is non rivalrous and in fact anti-rivalrous. Implied, the more the knowledge is shared, its value is enriched as a multiplier and thus greater utility for both providers and seekers.

Reciprocal Altruism

To many, information is given and take process. For instance, in discussion forums and bulletin boards on travel and tourism, there are queries on routes, accommodation, facilities to a particular destination. There is good possibility, somebody is familiar with the same and reveals the information about the same without any monetary consideration. However there is selfish gene at play. The provider is altruistic in the unexpressed anticipation that there would be reciprocity when he/she needs information about unfamiliar geography or topography they might wish to navigate in the near future.  Though no demand exists on this date, yet you supply information in the anticipation that others will supply the same when demand exists from your side.

Signaling

There is certain degree of knowledge in every individual and out of the knowledge arises wisdom. Yet there is propensity to demonstrate knowledge and wisdom to the rest of the world. Therefore the inherent tendency to offer unsolicited ‘gyan’ to all and sundry. Given the rise of platforms like Quora, Yahoo Answers etc, offering answers to questions posed is great way of signaling knowledge albeit in implicit way to the rest of the world. On platforms like Innocentive, Kaggle, demonstration of knowledge apart from being possible monetizing opportunity sends signals to prospective recruiters.

Recruiters often do not know the capabilities of their job hunters. An indirect mean of assessing their signal of capabilities is their performance on platforms like Kaggle etc. Those scoring high indicate a greater talent and thus a hot prospect for recruitment. Given the paucity of talent relatively speaking, it is important signal for salary negotiations too.

Practical’ solution

To many engaged in innovation, free revealing might be the only solution available. Their inability to scale up or commercialize leaves with no other option but the to reveal it. The spill overs from revealing the same in terms of signaling, linking to prospective recruiters etc. act as an incentive to reveal.  To some, revealing them to suppliers would be a step forward in ensuring stable supply of materials and other resources for further development.

Positive feedback loops

Steven Johnson in his book “Markets, Networks and Technological Evolution’ (2010) posits inventions are a function of efforts in networked ecosystem than an outcome individual furlough. The idea of lone scientist is passe. Therefore for users engaged in sort of innovation, irrespective of the reason, have all the reasons to share it with the rest of the community. Open hardware and open software platforms play a key role in diffusing the prototype and enabling the subsequent feedback loops. These loops go long way in developing the product from draft idea or prototype into an outcome ready to be monetized.

Reputation

McClelland posited that an individual’s action are in part to fulfilling her need for achievement, affiliation and power. To an innovator working away from the mainstream so as to speak, is desirous of being linked to achievement. The development of more and more innovations, improvisations etc enhance the reputation of the user innovator in the community thus perhaps implicitly satisfying the need for achievement. Similarly those answering prolifically on Quora, Reditt etc. too have their reputations enhanced. The reputation might not lead to direct spill overs in terms of daily lives yet add to their self-esteem. To quite a few, this might be step upward in Maslowian hierarchy.

No IP protection

To quite many an innovation, given the nature and context, little scope and prospect exists for leveraging the protection offered by intellectual property rights. The cost of acquiring such rights might outweigh any benefits. Further there might be difficulties in proving no prior art. Secondly, many of the innovations are essentially are improvisations or adaptations to given context making it difficult to go for IP protection as an individual. For firms given their portfolio, even small improvisations might not entail marginal costs of significant level to seek IP protection, yet for smaller innovators, it might be very difficult to do so. The alternative to protecting innovation and thus linking to themselves is ironically go for free revealing. The emergence of IP alternatives stand in good stead for such innovations.

Insufficient incentives

To quite a number of innovations, incentives are simply insufficient not to reveal the same and seek monetization. In such a scenario, it might make better sense to reveal and target the above objectives than keep it in house.

Reuse

To many academics, the signal of career progress is linked to the citation of their published works rather than ideas created. It must be observed that others are following your work and finding certain utility in the work. This implies a role of an academic in furthering the knowledge creation in his or her sphere. Therefore, publishing and thus sharing the insights garnered in their research might be a rational objective and thus enable its reuse

Substitutable information and Diffusion of Secrets

As the adage goes, nothing remains a secret especially when it is marked secret. Similarly in the industry, very little remains secret and each one knows or at least generic idea about other’s secrets. Further given the circumstantial necessities, it is possible they have worked substitutable ideas and thus very little incentive for keeping it secret. There is always a positive spill over of being first to reveal and diffuse and monetize the externalities than keep it hidden in house as trade secret. Moreover, to scientists and engineers, the need is the general principles in product development rather than the blue print for the exact product. Reverse engineering with adaptations adds to disincentive of keeping information secret when the general principles of designing and developing the same are well known.

Backward Bending Labour Supply Curve

For many, despite being passionate about certain things, it might not be possible to make it a career goal. Yet with passage of time, as they earn money and reputation in their career, they now turn attention to their interests be it art, music, theatre, design etc during their free time. The work leisure trade off depicted in backward bending labour supply curve would create positive supply in leveraging what Clay Shirky calls Cognitive Surplus. The output thus achieved is more of fulfilment of inherent passion than monetization thus allowing the creative to be revealed to the rest of the world.

Concluding Remarks

As we have observed there are several reasons for user innovators in multiple areas to reveal their information and achievements to the rest of the fraternity. This is what precisely would further aid development of goods, services, ideas art etc thus a positive spill over for the society





Comments

Popular posts from this blog

Decision Making as Output and Bounded Rationality

The Economics Origins of BCG Matrix

A Note on Supply-Demand Dynamics