Hafiz Nor Razak
Undergraduate was a very rewarding experience for me not only because I was constantly reading books for classes and enriching my mind, but because I also worked at the campus bookstore. Hence, I was constantly surrounded by books. One of the most popular books we had was Freakonomics. It wasn't a foreign book to me. My mother, being a College of Business professor, dubbed Freakonomics as a must read--even though I was a biology major. We even had it on our book shelf at home in Richmond, KY as part of a series of books that she wanted me to read. Spurning her wishes, I opted instead for books on cell biology or macro and micro evolution in nature. Fast forward 10 years later and it's funny how parental figures always get the last laugh. When I had the opportunity to cover this book for this foray, I jumped at the chance to uncover just why business minds the world over see it as a top 10 read in this field. By the end of the book, it felt like everything came full circle--so much so that there was an elegance about it.
Firstly, a main theme the authors expound on is the economic value of information. The example given was that the KKK used secret handshakes, coded greetings, clothing, etc. to exert power over marginalized racial groups. (Levitt, Dubner, 2009) An example of this is that upon meeting someone for the first time, a Klan member would use the “A-OK sign” hung around a belt loop to signal to another Klan member that they were part of the organization. However, this power was stripped from the Klan once these coded greetings and information became common knowledge. (Levitt, Dubner, 2009) In this manner, information had value to the Klan. It might not have been economic, but rather it was social power. Moreover, there are also consequences to imperfect information when supplied. In the business world, an imperfect forecast for a company can lead to market failures. This is the reason why analytics are fast becoming one of the highest cost centers within today's firm. Furthermore, whenever we draw a supply and demand curve, we assume we are given perfect information for the demand--hence dictating our supply, prices, and so on and so forth. But more often than not, as we've discussed, that information isn't perfect. Hence, firms need that business intelligence department to give them that competitive edge against other firms and narrow down what a perfect forecast might look like. As a final thought, this means that a firm can now quantify the economic value of information as equal to the cost of running their business intelligence centers.
In corporate America, Carolina Healthcare is one such company that places an emphasis on the economic value of information. Carolina Healthcare is the number one provider of healthcare in North Carolina. What makes them different and what has helped them skyrocket to the top is their data analytics center, Dickson Advanced Analytics (DA2). Since the passing of the Affordable Care Act, there was a shift in the health industry in terms of compensation from a fee-for-service emphasis to a fee-for-value emphasis in terms of medical care. This meant that the frequency by which patients came back for care shouldn't determine the cost of care, but rather the quality of care should. In other words, quality should determine how much a procedure costs and not quantity. With this challenge posed, DA2 kicked it into high gear by merging the Internet of Things with medical care. DA2 utilized population medical trends and integrated clinical data in order to figure out where a hospital or clinic should be built not only to offer better quality of care but also to give some populations easier access to care. They have also gone so far as to sync with patient FitBits, a wearable device that tracks heart rate, sleep patterns, and overall health, in order to increase the quality of care. DA2 is so successful that not only are they being used internally, but their services are sometimes requested externally by other firms. In this manner, Carolina Healthcare could very well turn a cost center into a profit center thereby utilizing the economic value of information to maximize company profits.
Another main theme of Freakonomics is the authors advocating for readers to challenge conventional thought. They posit that conventional wisdom is often wrong. Conventional wisdom is often observed by so called “experts” in the field. These experts make observations and draw conclusions without resorting to fact. The media then catch on and spout the same information and if repeated often enough, just like a game of telephone, what might have some factual inaccuracy is accepted as fact. The example drawn in the book is the stereotype that all drug dealers are rich. As an aside, I was very intrigued by all the math that goes into an illegal drug operation. The writers were expounding on fixed costs, variable costs, opportunity costs, sunk costs, all in relation to gang revenue. Literally, blood money. This is very much in line with my belief that even organized crime have members of their organizations that have an MBA or maybe even a Ph.D. simply because of how complex a venture like an illegal drug trade is to operate. I digress. The point is that drug dealers, while some do make it big, the majority still live at home with their mom simply because the revenue, once factored against general overhead, nets a modest profit.
Moreover, in the same vein of challenging conventional wisdom, there's this juxtaposition between correlation and causation. Just because two independent variables are moving in the same systematic way, does not equate to cause, but rather to correlation. To put it in the perspective of drug dealers, just because some drug dealers have a lot of money, it does not mean all drug dealers have a lot of money. In actuality, “drug dealers” having “money” is a correlative function and not necessarily a causative function. Furthermore, there's this myth that owners and laborers have the same goal in the end. When in fact, there are layered nuances to what each group desires. In the context of dealing drugs, owners want a safe and stable environment by which exchange of “goods” can take place. These market conditions are most favorable in contributing to maximum sales and profits. The laborer, or dealer, on the other hand could care less. The laborer is simply wanting to maximize his own worth. The laborer usually can do this by developing a reputation for being a killer and dangerous, not only to protect his stock from shifty clients, but also to scare competitors that may threaten his worth and ambitions of moving up in the “company”. Hence, the two have similar goals of maximizing profits, but both have completely different ways that they would go about achieving that goal.
AllState Insurance does a really good job of questioning conventional marketing. Traditionally, insurance marketing focused on quick responses in the wake of incidences, how they lead in cost compared to coverage, or other marketing campaigns targeted at how the customer would be safe in the event of a qualifying incident. AllState turned this convention upside down. Instead, AllState preyed on how unsafe a customer would be in the event of an incident. Commercials showed Mr. Mayhem (so-named because of the mayhem that can creep into everyday life) causing troubles for customers. For instance, Mr. Mayhem was a flag on the back of a truck. The flag “flew” off the truck and covered the windshield of the car behind them thereby causing a major wreck. The tagline was “Your cut-rate insurance may not cover you in the event of Mayhem.” Their “Mr. Mayhem” campaign has paid off really well to the surprise of marketing experts. This proved that firms can use scare tactics in order for a consumer to buy a product, IF they are willing to provide a solution for how to avoid a given predicament. Originally, utilizing scare tactics in order to sell was a business taboo, but by questioning conventional wisdom, AllState came out a winner.
Finally, one of the most profound themes discussed in this book was that incentives are the cornerstone of human action. They qualify that incentives come in three forms. There's economic incentives that people respond to in a marketplace. There's social incentives where people care or worry what others will say or think about them that dictates an individual's action. And finally, there's moral incentives which appeal to an individual's barometer of what is right and what is wrong. The book then tells a story about what sumo wrestlers and school teachers both have in common. To make a long story short, both of these positions are usually held by people of higher moral standards than the average Joe. However, both of these people will cheat when it becomes convenient to them. It was proven that in about 5% of classes taught by school teachers in Chicago, a right answer will be substituted in for the wrong answer because of how standardized testing determines budget appropriations for schools. Likewise, sumo wrestlers will throw a match when it really counts. For instance, in the event that it maintains an opponent's ranking in the hopes that it will work to their advantage in a future matchup. This just goes to show that the three incentives are all interchangeable and the pull from each of these incentives are different at different times. A school teacher or sumo wrestler may perceive ‘moral incentives' as inconvenient if ‘economic incentives' are in play.
As a salesperson at Verizon, my whole life is based around incentives. What's weird to reflect on is how can lower performers accept their performance? How does one economically incentivize laborers who don't respond to economic incentives? Let me rephrase. All laborers are economically incentivized. But how does an owner incentivize laborers to want more, economically? And if, in the end, all laborers want more, how come actions sometimes not reflect this want? Freakonomics may have answered this question for me. Within each of the three types of incentives are varying degrees of magnitude. If a laborer places a higher value on social incentives instead of economical incentives, then money means less and instead, the laborer is more motivated by what others perceive their performance as and not necessarily the output of their work. As a final thought, and really what inspired this foray, it frustrates me that some coworkers of mine accept mediocrity in their personal and professional development. But different incentives have different pulls at different times.
Conclusively, so much of the book studies economics from a pragmatic, almost layman's, viewpoint of the field. There are tons of research cited and how lessons can be drawn from it economically. I feel like this was, for its day, a very novel approach to explaining economics and the fallacies that we run into everyday. I loved that a central concept of the book was to question convention. It becomes very healthy for any discipline, academically or everyday application, for us to question the status quo because asking questions is healthy and spurs further research which can enhance understanding of a subject matter.
A study that I would absolutely love to undertake is “How different incentives are ranked by children in their formative years and how rigid is this ranking system as they mature into adolescence and adulthood?” This study would have two primary questions it seeks to answer. And these two primary questions can be broken down further.
First and foremost, what do the majority of children in their formative years rank the highest in terms of the three different types of incentives? My hypothesis would be ‘moral incentives' simply because of their youthful innocence. And the second part of this first question is, “Why do these children rank the influences the way that they do?” One can expect parental figures, faith, environmental pressures, etc. would rank among the highest frequencies as factors that affect the incentive rankings.
Secondly, the research has to show how rigid or nonrigid these rankings are as the kids age. Do these rankings change as they mature? Why do they change? Are they more dynamic than static? This question would add another variable to the study, time. Accounting for time allows us to further quantify the study of the three incentives.
Data would be obtained having children ages 5 to 8 take surveys pertaining to the research questions. This same group of kids would again be surveyed when they reach 13 years of age. And finally, another survey would be taken at age 18 to study rigidity of their ranking system over time. Since we're using children as test subjects, a third party presence will be present in the process of administering the surveys to make sure standards are followed.
The significance of this study would be far reaching from a marketing standpoint. If incentives really are the cornerstone of human action, then significant resources must be invested in this study to understand what drives human action as we age and form opinions.
Takeaways for Verizon
Just recently, Verizon laid off about 40,000 support workers. Many of these workers had functions relating to Business Intelligence. Hence, the frontline (workers who directly faced the customer), were directly affected by this. At any one time, about 10 to 50 different promos are running for us to utilize and drive growth for the company. However, with these layoffs, the frontline have to do more research on just exactly how certain promos would work. If a frontline rep, for instance, wanted to know exclusions and hypothetical what-ifs for a customer, they would have to spend an hour on a phone with a support rep in order to acquire an answer. This would take away floor time and increase transaction times for reps, hence hindering our performance and the company bottom line. Before the layoffs occurred, we were all briefed via video journals almost once a week as to the promos and getting on the phone with a support rep would have only taken five to 10 minutes since there was more labor to keep up with our work demand.
My point is this, in this day and age, you can literally put a number on the value of perfect economic information. Not investing in our business intelligence department is a crime and will start to work against us because not only is it about supporting the frontline, but it's a source of our core competency and how we gain our competitive advantage. As the authors of Freakonomics go on to say, just like the Klan, information is power. Some business, like Carolina Healthcare, have completely grasped just what it means to compete in today's corporate landscape. While Verizon is far and ahead the number one wireless carrier in terms of total customers, we will have to reinvest in our business intelligence if we want to sustain this advantage.
Levitt, S. D., & Dubner, S. J. (2009). Freakonomics: A rogue economist explores the hidden side of everything. New York: Harper Perennial.
...(download the rest of the essay above)