The July/August issue of the Harvard Business Review has a feature by McKinsey & Company on 10 Trends You Have to Watch. The premise is after a year in turmoil, business executives are starting to look towards the future. However, the world has changed, and with it, so have some key trends.
The trend that caught my attention – Management as Science — falls squarely in the datarati realm:
“Data, computing power, and mathematical models have been transforming many realms of management from art to science. But the crisis exposed the limitations of certain tools. In particular, the world saw the folly of the reliance by banks, insurance companies, and others on financial models that assumed economic rationality, linearity, equilibrium, and bell-curve distributions. As the recession unfolded, it became clear that the models had failed badly.
It would be wrong to conclude that managers should go back to making decisions only on the basis of gut instinct. The real lessons are that the tools need to incorporate more-realistic visions of human behavior—most likely by drawing on behavioral economics, becoming more dynamic, and integrating real-world feedback—and that business executives need to get better at using them. Companies will, rightly, continue to seek ways to exploit the increasing amounts of data and computing power. As they do so, decision makers in every industry must take responsibility for looking inside the black boxes that advanced quantitative tools often represent and understanding their functioning, assumptions, and limitations.”
In retrospect, this makes perfect sense. Human behavior is far from universally predictable. Recall how the U.S. Government expected citizens to re-invigorate the economy by engaging in non-essential shopping with that first stimulus check. Instead, what did many do? Paid bills, bought groceries or tucked it away for the tough times to come. Survival instincts won out over an algorithm.
Once you recognize that behavior matters, a natural follow-on is, “where does behavioral data come”? No surprise, Google has a veritable treasure trove:
“Wu calls Google "the barometer of the world." Indeed, studying the clicks is like looking through a window with a panoramic view of everything. You can see the change of seasons—clicks gravitating toward skiing and heavy clothes in winter, bikinis and sunscreen in summer—and you can track who’s up and down in pop culture. Most of us remember news events from television or newspapers; Googlers recall them as spikes in their graphs. "One of the big things a few years ago was the SARS epidemic," Tang says. Wu didn’t even have to read the papers to know about the financial meltdown—he saw the jump in people Googling for gold.”
As for the rest of us, we can mine internal and public datasets, setup prediction markets, employ sentiment tools and/or hire behavioral economics consultants. First though, I’d recommend familiarizing yourself with the field of behavioral economics, and pay special attention to the datarati ties. I plan to ease myself in with Dan Ariely’s Predictably Irrational.
If you have experience applying behavioral economics in your business, or reading/learning suggestions, please share what you can in the comments or via email.