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Saturday, 14 August 2010

Advertising on the Handicap Principle

Fuzzy Peacock Intuitions

Biologists have been long perplexed by the peacock’s tail, economists by the use of advertising. In both cases the struggle has been to understand why something so self-evidently pointless and potentially damaging can survive in a vicious world of winner-takes-all, loser-goes-extinct natural selection. Meanwhile researchers from both worlds have been closeting themselves ever deeper in an arcane world of computer modelling, where truth can be validated only by mathematics.

Hints of answers to these puzzles have come not from number crunching but from fuzzy human intuitions about the way the world actually works. Peacocks and advertisers have something in common – in both cases it turns out the handicaps they place themselves under send signals to their potential suitors. Behavioral advertisers, who aim to remove these handicaps, take note: a peacock without a stupid tail won’t get a mate and an ad that’s easy to deliver won’t get a customer.

Demand and Seek

For a long time economists persevered with a view that advertising was a pointless activity that largely involved companies spending money generating unnecessary demand: advertising provided no useful economic function. Probably the leading proponent of this view was John Kenneth Galbraith whose Affluent Society argues that advertising was a way for businesses to create artificial needs amongst consumers while neglecting their real needs: stuff like clean air and proper education. At best advertising was informational, at worst persuasive. Neither offered any genuine economic benefit.

However, in 1961 George Stigler pointed out in The Economics of Information that figuring out the market price of something far from being easy was actually quite hard for individuals, leading to significant variations in price for the same goods – so-called price dispersion. The cost of searching out the best price meant that the cost of advertising may be worth it to the producers if it sufficiently reduces consumer search costs.

Signalling Fitness

This, however, only covers a small subsection of advertisers. The rest of them still seemed to be wasting their money on a pointless economic activity. Richard Nelson, however, wondered in Advertising as Information if that was exactly the point: by showing that they could waste money the advertisers were signalling something important to the consumer: rather than simply advertising for Stigler’s “search qualities” some adverts were advertising for “experience qualities”:
“The miniscule amount of direct information from advertising for experience qualities gives the consumer an incentive to extract any conceivable indirect information that would help. Such indirect information is available from advertising. The consumer can learn that the brand advertises. I contend that this is the useful information that the consumer absorbs from endorsements of announcers, actors and others who are paid for their encomiums. These and other advertisements for experience goods have no informational content. Their total informational role – beyond the relation of brand to function – is simply contained in the existence. The consumer believes that the more a brand advertised, the more likely it is to be a better buy. In consequence, the more advertisements of a brand the consumer encounters, the more likely he is to try the brand.”
Sexual Selection

Meanwhile over in the world of biology researchers were still struggling with the non-mathematical ideas of Charles Darwin, in particular the nature of sexual selection. Darwin differentiated this from natural selection as a means of explaining why features that otherwise were clearly not in an animal’s best interest could survive – like the exceptionally long tail of the peacock. This may be great for impressing females but is next to useless when it comes to anything an economist might regard as useful – such as having to fly away from a predator. Darwin’s idea was that a slight predisposition on behalf of the female of the species to select for a particular trait – big tail, stupid antlers, huge and infeasible pectorals – could lead to a runaway effect.

The problem with this idea is that selecting for one trait that can render the creature unfit is a bit of an evolutionary dead-end. It’s not impossible, but it does seem a bit unlikely. After all, if the selected for feature ultimately means that the animal is more likely to be gobbled up as tasty treat it’s probable that no matter how attractive it originally was to the female, a live male with less interesting features is probably going to have more reproductive success on account of actually being alive to mate with.

The Handicap Principle

Then Amotz Zahavi, an Israeli biologist, had an insight. He wondered if the handicap of the exaggerated feature was actually conferring some biological benefit over and above merely making the animal appear drop dead gorgeous. In fact, he wondered if the mere presence of that trait, however much of a handicap it might be, was actually signalling to females that the male was, all round, a better genetic specimen. This is the maddeningly perverse Handicap Principle.

In fact Zahavi went further, and argued that the apparent handicap was actually serving another purpose: the ridiculous tail feathers of the peacock, the unwieldy antlers of the elk, the peculiar pectorals of the gym jock and all of the other ridiculous handicaps that many animals seem to come with are actually an evolutionary advantage – they discourage competitors and predators just as much as they attract females. The girls aren’t stupidly selecting for a single sexually attractive feature, they’re honing in on a sure sign of general evolutionary fitness: surviving in spite of the handicap proves overall fitness.

Handicapped Advertisers

Biologists by and large refused to believe in the handicap principle until someone managed to come up with a mathematical model showing that it was “true”. True or not the relationship of the handicap principle with advertising is pretty obvious. Just as the exaggerated features of some animals signal fitness to potential mates and competitors and reduce their search costs for a halfway decent mate so advertising lets consumers judge the quality of the producer and eases their ability to find the best product. Not only is advertising not economically redundant it’s not even new by about a few billion years.

Now into the world of advertising has arrived the recent idea of making people tell intermediaries what they’re interested in. Behavioral advertising tracks what people surf on the net and accesses this through examination of the cookies that are stored every time we hit a site. Indeed there are even flash cookies that can’t easily be deleted and which will restore normal cookies even after we’ve deleted them. All this so advertisers can detect what we’re interested in and serve up adverts dedicated to us.

Quality not Quantity

Surveys conducted so far show that people aren’t awfully keen on this, but leaving this aside the handicap principle tells us that the idea will fail anyway. We select our products on the basis that the peacock with the really big tail is incredibly fit anyway, not that he’s able to get around to a load of lonely old spinster peahens really easily and cheaply. Of course, maybe a few people will be fooled by association with expensive adverts, but to be honest the ability to serve a few vaguely relevant ads over the internet isn’t really cutting the mustard.

Economists can learn from biologists, both can learn from people who observe and think rather than those who sit in front of computers all day and behavioral advertisers need to figure out how to convey information that really matters rather than sticking unimportant bytes under people’s noses. No matter how far technology takes us psychology will continue to trundle along its own path. With luck all concerned will figure these basic ideas out soon. Alternatively they’re operating on their own handicap principle, just not in a very useful way.

Related Articles: Financial Lessons in Mass Deception, Complexity in Financial Systems, When a Dollar's Not Just a Dollar


Rob Bennett said...

My sense is that advertising works because it is responsive to "Safety" concerns.

If you are in a new town and there are 20 different places to eat, you have no way of knowing which of them is a bad choice. You would prefer to make the best choice. But your primary desire is just to avoid the really bad choice. One of the choices is McDonalds. How bad could it be if you've heard of it before? If if were really, really bad, it would not have lasted long enough for you to have heard of it.

I think that the flaw that the researchers are making is assuming that people are trying to make best choices. It may be that they are just trying to avoid worst choices and that advertising can help a lot there.

I think the same sort of reasoning applies with investing decisions. Most of us are not trying to maximize return and minimize risk. We are trying to avoid worst choices. So we want our money in investment choices that are popular at the time. How bad could they be if they are popular?

In the absence of knowledge, we go with what seems safe. Advertising helps make things seem at least somewhat safe.


walt said...

So Rob, buying a house was popular because it was safe: the prices 'never' went down, until they did. This is true for other investments, even bonds.

rajan lukose said...

Thought you might be interested in this

idavies said...

Bob, I really liked your insight about avoiding a bad choice - it applies to many purchasers in situations where they are making mundane purchasing decisions. For the same item, (medical devices - perhaps an extreme example)I have seen involved customers who make intensive technical comparisons, and even evaluations, whereas many others just look to reference users -playing safe - they don't get much return for fully evaluating their choice but they feel safe buying what everyone else buys - and advertising can build that sense of security that there is a buyer base out there, others have already done the digging, tried the product and come back for more. That is why the company has money to advertise, even if the advert does not deliver a succesful positive message. It nevertheless displays "fitness"
This-safety-in-the-absence-of-preference behaviour represents a huge proportion of default buying decisions and leads to exploiting the full potential of a product as it moves through its life cycle.
To see "unneccesary" advertising as unstated proof of the product/company "fitness" is a really helpful insight for influencing this type of purchasing decison, dare I say a "natural selection".

Baltimore Investment Management said...

Great, insightful post. I do, however, disagree with your assessment and predictions for advertising online. For example, I am in investment management in Baltimore, but I also have a healthy knowledge of current online marketing trends. The ability to target users so specifically is actually cutting the mustard in the advertising world. In no other medium can you track and manage the effectiveness and relevancy of advertisements. I'm just not sure that your assessment of online advertising is thorough enough to endure a fair chance against the handicap principle.

timarr said...

I'm just not sure that your assessment of online advertising is thorough enough to endure a fair chance against the handicap principle.

Me neither, but I was interested to see if anyone had a view because, after all, the handicap principle isn't the only way that evolution judges fitness. Handicap isn't the only economic advantage either: reducing search costs in an on-line world is another potential explanation. Personally the only problem I have with some of these adverts is that they often seem more like spam than useful information. More on that anon.