Behavioural Economics and the Facebook IPO

Facebook, the social network, has raised $16bn in an initial public offering that values the company at $104bn, meaning it is now among the 25 most valuable public groups in the United States. This recent article by John Wasik (Reuters Money) discusses whether or not it is a good idea to get a piece of the action. Daniel Kahneman declined to comment specifically on Facebook, but raised the importance of a number of behavioural biases: overconfidence, optimism-bias and anchoring; to name a few. Liam has blogged before on behavioural finance, and I flagged the work of James Montier in a comment on that post. Avanidhar Subrahmanyam's review of the behavioural finance literature is available here, free-to-access.

The Psychology of Facebook

Of the 20 most popular websites in the world, 13 relate to corporations that have European headquarters in Ireland: Ebay, Google, Yahoo and Facebook. The last three of these corporations have been the source of much commentary on this blog. Facebook (FB) has 1.5 millions users in Ireland and it is competing strongly with Google for web-user time-allocation. The chart below (from comScore/Citi) shows FB's increasing share of web-user time-allocation since 2006. FB has an explicit interest in internet economics and it has been mentioned many times before on this blog: from ambient awareness to the App Economy, FB search data to Mulley Com's study of FB eye-tracking, the choice architecture of FB, the FB Global Happinness Index, and of course, the debate on whether FB-use hurts students' grades.


Earlier this week in the Irish Times, Eoin Burke Kennedy wrote an interesting article about the psychology of FB. "Extroverted people tend to have more friends on Facebook but reveal less about themselves while introverts disclose more personal details but to a smaller group." Extraversion is one of the Big 5 personality traits: often discussed on this blog in the context of non-cognitive ability. Here and here, for example. The Big 5 personality traits have also been discussed on this blog before - in relation to social networking and web-users' choice of email address. Readers who find these topics interesting may want to read about the developing field of cyberpsychology - this subject encompasses all the psychological phenomena that are associated with or affected by emerging technology.

The content of the Irish Times article (mentioned above) is based on work by Dublin Business School psychologist Dr Ciarán McMahon. "McMahon has conducted an extensive review of the psychological literature on Facebook to better understand what makes it tick". McMahon runs a blog, PsychBook Research, which links to one of his recent presentations: "Facebook and psychology: What we know so far". While the Geary Blog has often mentioned the career opportunities for economists in corporations such as Google, Yahoo, and Microsoft; and opportunities for applied economists in private sector firms such as Netflix, SeatGeek, Yapta, Inon and Nielsen; opportunities for psychologists seem likely in Facebook, and in other Web 2.0 commerce.

Daily default option link

Several US Senators have concerns about the privacy of personal data on Facebook. In a letter to Facebook's CEO they assert that the FTC will likely investigate these issues in due course. However:

"In the meantime, we believe Facebook can take swift and productive steps to alleviate the concerns of its users," they wrote. "Providing opt-in mechanisms for information sharing instead of expecting users to go through long and complicated opt-out processes is a critical step."

A Few Links

1. MySpace has allowed a large quantity of bulk user data to be put up for sale: user playlists, mood updates, mobile updates, photos, vents, reviews, blog posts, names and zipcodes. Friend lists are not included.

2. InfoChimps is a bulk data marketplace with more than 5000 data sets in its catalog so far. The vast majority are free.

3. A Mulley Communications/NCI study shows that people do not pay much attention to more than three results on a Google search result page. Also that the ads on the right hand side of the results page are barely looked at.

4. Here is a video of heatmaps being generated based on eye movements.

5. It's worth looking at data-series on capital expenditure: in this case in the UK. A pick-up in this series should lead improvements in employment figures.

6. Ellerdale, still in alpha testing, tracks data sources from around the web, primarily Twitter, and examines what topics are being discussed. It then organizes these conversations into categories like "people," "sports," "politics," "music," "television," and more.

7. The most rented movie in Chicago last year? "The Curious Case of Benjamin Button." This app on the NTY website allows for examination of Netflix rental patterns, neighborhood by neighborhood, in a dozen cities.

8. Netflix have announced that they canceling plans for a second Netflix Prize contest, one that would have involved the release of more information than the first.

9. Privacy concerns were an issue in the Netflix decision. Among the first to draw attention to the issue was University of Colorado law professor Paul Ohm, who said: "Researchers have known for more than a decade that gender plus ZIP code plus birthdate uniquely identifies a significant percentage of Americans (87% according to Latanya Sweeney's famous study)."

10. Here's a recent paper by Ohm on re-identification of individual data.

11. The deadline for Facebook's Ph.D. Fellowship Program has passed, but it's interesting to note that they have a particular focus on Internet Economics.

Facebook Research

Day-of-the-week effects have been mentioned on the blog before, including research by Gerard O Neill from Amarach Consulting. A recent article in the New York Times reports that "there is a 9.7 percent increase in happiness on Fridays compared with the worst day of the week, Monday. That is among the discoveries made by Facebook researchers with access to two years of anonymous “status updates” from 100 million users in the United States."

The Facebook Global Happinness Index (from www.ourkitchensink.com) is shown below. The Facebook Research page related to this index is available here. The Happiness Index is based on the Linguistic Inquiry and Word Count (LIWC).


Updates from Facebook's data-team can be accessed here. The Top 15 status terms of 2009 can be viewed here. Analysis of maintained relationships on Facebook can be viewed here. With more data than ever available through the rise of Web 2.0, the Flowing Data blog suggests that we may see the rise of the "data-scientist".

The Economics of Attention

Your attention is a scarce resource. In the Information Economy, this is more critical than ever. Before I elaborate on the economics of attention, I want to motivate its importance based on previous posts about scarcity in resources that are not land, labour, capital or enterprise. We've heard about the knowledge economy, information economics and time-allocation. While knowledge, information and time are important, it may be time to turn our attention to, well... attention - the new scarce resource.

To illustrate how economists think about 'non-traditional scarce resources', I'll begin with a discussion on time use (or time-allocation). This resource is the closest in essence to attention (with knowledge and information being more similar in their nature; also, attentive use of time is needed to acquire knowledge and sift through information). Time-allocation is the first-stage decision in various production functions; on top of this comes the application of attention. As time-use has been discussed quite a bit on this blog, it's a good place to start. Here's a paper about student time use and academic performance; here's one about whether the recession is making students study harder.

More recently there was a link to the presentation at Google by Zimbardo and Boyd on time perspectives. In the MetaPsychology review of Zimbardo and Boyd's book, the point is emphasised that time cannot be replenished - in contrast to other goods, such as gold, diamonds, etc. Therefore, you have to be more careful about how to spend your time. Zimbardo and Boyd ask: "Why do we often spend our money more wisely than our time?"

I agree with Michael Daly that the ability to recognise our time perspectives and to switch between perspectives efficiently is important (see a brief summary of the perspectives here). Aaron Swartz suggests that "time perspective” is a concept which Zimbardo has essentially come up with himself, but which he feels (not without some justification) is rather important.

I'm inclined to agree - after reading about and working with the consideration of future consequences scale (CFC) a lot - "time perspective" seems to offer a more comprehensive theory of how we interact with "time". There of course may be scope to use both the CFC and the Zimbardo Time Perspective Inventory in a research project - a recent article by Adams and Nettle in the British Journal of Health Psychology does just that.

In addition to time-allocation and time perspectives, 'attention' plays an important role in how human behaviour produces outcomes. The most illustrative example I can think of is the recent debate on student time use and online social networking. The question that we debated was "does Facebook hurt your grades?". The conclusion offered by Aryn Karpinski (at Ohio State University) is that her research does not suggest that Facebook directly causes lower grades, merely that there's some relationship between the two factors. "Maybe [Facebook users] are just prone to distraction. Maybe they are just procrastinators".

An attempt has been made to replicate the results of Karpinski's research. Eszter Hargittai, associate professor of communication studies at Northwestern University and a fellow this year at Harvard's Berkman Center for Internet & Society, says the following: "We found no evidence that Facebook use correlates with lower academic achievement". More details on this are available here.

The main point I want to make is based on the opening comment in this post: that attention is a scarce resource. While students may allocate their time across activities such as study and online social networking, how much attention are they giving to each activity? Are they so zoned into Facebook that that they can't cope with the Twitter Mania, but when it comes to study is the intensity a lot less? Is designated study time interrupted by SMS text messages, tweets and the like? Or is there just less concentration applied to the activity of study?

On his MindBlog, Derek Bownds states that concentration is the issue of our time(s) (sic). He mentions a NYT article by John Tierney on the science of concentration. A clip from this is below:

"You can lead a miserable life by obsessing on problems. You can drive yourself crazy trying to multi-task and answer every e-mail message instantly...Or you can recognize your brain’s finite capacity for processing information, accentuate the positive and achieve the satisfactions of... the focused life."

With attention and concentration such critical issues in the production functions for study, research and a whole range of activities that feed into the knowledge economy, I have taken a renewed interest in mindfulness - something which Michael has mentioned on the blog. A number of times. Liam also linked to a lecture by Kabat-Zinn on mindfulness - originally presented to staff at Google.

The framework I am most interested in, however, is what this blog post is essentially about - the economics of attention. Attention economics is an approach to the management of information that treats human attention as a scarce commodity, and applies economic theory to solve various information management problems. It's not new - Herbert Simon was perhaps the first person to articulate the concept of attention economics when he wrote:

"...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" (Simon 1971, p. 40-41).

Simon noted that many designers of information systems incorrectly represented their design problem as information scarcity rather than attention scarcity, and as a result they built systems that excelled at providing more and more information to people, when what was really needed were systems that excelled at filtering out unimportant or irrelevant information (Simon 1996, p. 143-144). We have such systems now - you can skip the ads on TV if you want! You can also block out email spam.

"Attention economics" today is largely concerned with the problem of getting consumers to engage with advertising (sellers compete for scarce attention). However, it would be worth developing a stream in attention economics that relates to academic production functions, the knowledge economy, health behaviour and well-being. A final thought: we should all be careful with those little drops of dopamine. And bear in mind that business is going to get your attention using style, for style is what competes for our attention amidst the din and deluge of the new media (see Richard A Lanham - The Economics of Attention).


Simon, H. A. (1971), "Designing Organizations for an Information-Rich World", written at Baltimore, MD, in Martin Greenberger, Computers, Communication, and the Public Interest, The Johns Hopkins Press, ISBN 0-8018-1135-X.

Does Facebook Hurt Your Grades? Can Twitter Make You Smarter? What About YouTube?

Does Facebook hurt your grades? This may be the question that parents everywhere will soon be asking their children. There is the argument that students cannot blame Facebook because if Facebook did not exist, they would find another distraction. However, Facebook users under parental supervision will probably have scant praise for the researchers from Ohio State University who have shown that the majority of students who use Facebook every day are underachieving by as much as an entire grade, compared with those who shun the site. See the story in the Times here.

The researchers discovered that students who spend their time accumulating friends, chatting and “poking” others on the site may devote as little as one hour a week to their academic work. “It is the equivalent of the difference between getting an A and a B,” said one of the researchers, Karpinski. Of course, this does not account for selection bias and unobserved characteristics. Also, the researchers have not yet analysed whether a student’s grades continue to deteriorate the longer he or she spends on Facebook. So the same individuals have not been tracked over time.

A new YouTube offering may take up as much of students' time as a Facebook account, though it may help their grades. "YouTube University" has gathered together all the video channels of the universities and colleges it's partnered with over the years and put them under the YouTube EDU banner. One of the videos (below) is from the University of Minnesoata and is about using Twitter, Wikis and instant messaging in the classroom.

Educational researcher Cynthia Lewis says that the use of social media in the classroom serves two purposes. The first is catching the attention of students and increasing their participation in the classroom. The second is preparing them for communicating in tomorrow's new media landscape. She says that "21st century literacies are all about digital media".





While it may be the case that too much Facebook can hurt your grades, doing the right amount of social networking through online platforms can help your career and is also a lot of fun. Plus, it may help learning in the classroom.