Behavioral economics and crowdsourcing

Behavioral economics uses social, cognitive and emotional factors in understanding the economic decisions of consumers. It integrates insights from psychology with economic theory.

Social vs. market norms

Imagine you are at a dinner at your mother-in-law’s house. Try to answer the following question:

• Would paying be a good idea?

Answer to this questions seems to be pretty straightforward. It is simple, because we assume to apply social norms here. According to social norms, that are defined as derived from our social nature and our need for community, you wouldn't be required to pay for the meal.

However, from the market norms' perspective - based on costs and benefits - you would.

Working for a cause vs. working for money

In many cases people work more for a cause than for cash. Let's analyze the results from the AARP (American Association of Retired Persons) study. When lawyers were asked to offer less expensive services to needy retirees ($30 an hour) – they declined. However, when asked to offer free services – they agreed.

What does it tell us?

People act differently under social and market norms.

Do they also perform differently?

Performance under market vs. social norms

Let's now have a look at how working under social vs. market norms affects performance.

Case 1: Working for money
Students were asked to perform a boring task for 5 minutes

• Group 1 didn’t get paid
• Group 2 got 5$
• Group 3 got 50 cents

Results:

• Group 1: best performance
• Group 2: slightly worse
• Group 3: the worst 

Case 2: Working for a gift
The same experiment with gifts:

• Group 1: no gift
• Group 2: chocolate worth 5$
• Group 3: chocolate worth 50 cents

Results:

• All three groups had the same performance

Even small gifts keep us in the social exchange world – and away from market norms

Case 3: Work for an explicitly priced gift

• What about “50-cent snickers bar” and “five-dollar box of Godiva chocolates”?

Results:

• The same performance as with money: the students reacted to the explicitly priced gifts the same way they reacted to cash

Once market norms enter our considerations, the social norms are pushed out

Summary

Heyman and Ariely (2004) distinguish between monetary markets and social markets:

• Monetary markets are highly sensitive to the magnitude of compensation, whereas social markets are not
• Money market: effort depends on reciprocity, the amount of compensation directly influences individuals’ level of effort
• Social market: effort is shaped by altruism, the amount of compensation is irrelevant
• Explains a well established observation: people sometimes expend more effort for no payment (vs. low payment)
• Mixed markets closely resemble monetary market: signaling that a compensation is equivalent to money invoke market norms

Crowdsourcing and open source projects operate under social norms. As research shows merely activating the concept of money completely change the setting and heavily influence people's performance.

Next post will cover some other aspects of psychological concept of money. Stay tuned!

Source: Heyman, James, and Dan Ariely. "Effort for payment a tale of two markets."Psychological Science 15.11 (2004): 787-793.

Crowdsourcing: social phenomenon in monetary markets

Today, probably everybody has heard about crowdsourcing. However, do you know what is it? More importantly, do you know why do we do it? How do firms exploit it? And what are the implications for competition?

This post starts a short series on crowdsourcing. We will have a closer look both at psychological aspects and market consequences:

• How concept of money changes personal and interpersonal behavior?
• Enterprise 2.0 and social networking within corporation
• What drives people to contribute for free?

Today we start with general information about crowdsourcing, definition and examples.

What is crowdsourcing

—First time this term was coined by Jeff Howe in June 2006 in Wired. Howe presented crowdsourcing as a

"business model that leverages the power of online communities for profit". 

"Wired" cover: June 2006

It combines 

"the best aspects of open source production and outsourcing".

According to Wikipedia —

“crowdsourcing is defined as the act of taking a task traditionally performed by an employee or contractor, and outsourcing it to an undefined, generally large group of people, in the form of an open call.”

There are three main pillars of crowdsourcing:

• —Collective intelligence: a million heads are better than one 
• —Crowd wisdom: aggregating the individual solutions of many is often better than collaboration for problem solving 
• —New media technology (Internet): helps cast a wide net to harness this talent

The power of the crowd

Empire State Building

Facebook 1bn users spend on average 8 hours per month on the site

= 8 billion hours per month

= 266 million hours per day

Empire State Building took 7 million man hours to build. Time spend every day on Facebook is enough to build 38 new Empire State Buildings every day!

Why do users contribute?

They contribute for a sense of collaboration and trust. Below are the main drivers for users' contribution:

• Collect participants’ resources or data 
• To get a reasonably immediate rewards 
• Social rewards, being part of the community 
• Reputation 
• Self expression 
• Altruism 

If you are interested in how concept of money changes social behavior, stay tuned for the next post.

Source: Cook, Scott. "The contribution revolution: Letting volunteers build your business." Harvard Business Review 86.10 (2008): 60-69.

What are the advantages for companies?

1. —Cost advantage. These sites enjoy free “raw materials”, ex: eBay, an online store with no inventory 
2. —Scalability advantage. Contributions of countless people can be aggregated into vast compilations that surpass traditional offerings. Wikipedia has ten times as many articles as Britannica. 
3. —Competitive advantage. The network effect put in motion a spiral in which increasingly more people choose to use and contribute to it.

The Economics of Technology Sharing

In this post I will try to answer the question why programmers invest their own time in OS projects? What motivates them to contribute and what is in it for commercial companies?

Literature provides us with 6 possible reasons:

• Improve performance in paid work (e.g. system administrators looking for solutions for their companies) 
• Intrinsic pleasure (e.g. cool project) 
• Future job offers, shares in commercial open source based companies 
• Ego gratification from peer recognition 
• The promise of higher future earnings 
• Intellectual curiosity 

Signaling 

Other very important reason for investing programmers’ time in open source projects is signaling, i.e. proving high level of competence. Why this is important in OS? Because the ability to signal a high level of competence can be higher in an OS project. 

• Outsiders can see the contribution of each individual 
• The programmer takes full responsibility for a subproject 
• More knowledge can be transferred to new environments, because many elements of the source code shared across OS projects 

Let’s have a look at the Apache Project.

Instead of central leader they have a series of committees to resolve open issues. There are five levels of rank within the Apache Software Foundation (ASF): 

• Developer 
• Committer 
• Project management committee member 
• ASF member 
• ASF board member 

Advancement is made in recognition of an individual’s commitment and contribution to an Apache project. Empirical study (Hann et al 2004) showed that: 

• Sheer volume of contribution have little impact on salary 
• Moving into higher rank resulted in 14-29% increase 

Commercial Firms

Commercial firms may interact with open source projects in a number of ways:

• Benefit from complementary markets 
• Benefit from learning 
• Benefit from good public relations 
• Compete directly with open source providers 

Example: IBM and HP released codes to open source communities

Why?

Bait and hook: if the released code will be used more widely, profits in the complementary segment will grow (e.g. from consulting services)

Other very important reason is that many small developers are uncomfortable doing business with large firms, that may compete in the developers segment and reduce price in order to raise demand for the broad software platform.

By contrast, when a large firm makes its platform available on an open source basis, the small firm need no longer fear being squeezed.

However, we don’t know if the corporation will keep all source code in the public domain? Or if it will highlight important contributions adequately?

In this case important licensing plays important role.

Open source licenses

Permissive license

users retain the ability to use the code as they want. Common in projects with strong appeal to the community of contributors

Restrictive license 

common in projects geared for end users who are unlikely to appreciate the coding (e.g. computer games)

Quality

There is no consensus if open source software is superior to “off-the-shelf” commercial software. Advocates of OS code’s higher quality stress that:

• Users can enhance quality 
• Users can customize it to meet particular needs 
• There is a superior development process: 
• Workers in commercial firms may not report errors of fellow employees – however OS programmers do not have incentive to collude, and their project is more peer reviewed 
• Security flaws are more easily identified because many people are involved 

Counter arguments:

• The openness of the code allows hackers to figure out its weaknesses 
• Poorer documentation (due to the incentives structure) 
• Poorer user interface 

Public policy

Governments around the world encourage the development and use of open source projects. However, the impact on social welfare is not conclusive:

• OS projects have access to a larger talent pool 
• On the other hand: free riding problem 

According to static point of view, any potential user has access therefore OS increase social welfare.

Dynamic view states that developers may lack incentives to introduce new products therefore OS reduce social welfare.

Bibliography: Lerner, Josh, and Jean Tirole. The economics of technology sharing: Open source and beyond. No. w10956. National Bureau of Economic Research, 2004.