Information cascades, structural change and public sector governance

Information cascades, structural change and public sector governance

I have recently been reading The Wisdom of the Crowds – a book by James Surowiecki.

In particular I found the experiment devised by economists Angela Hung and Charles Plott (p. 64) interesting and will test it out in a classroom on some appropriate occasion myself. The experiment is a good tool to visualise concepts like imperfect information and information cascades.

Two boxes both containing marbles are put on top of a desk. One box has twice as many white marbles compared to black marbles and the other box twice as many black marbles compared to white marbles (you can choose any colour off course).  Information is imperfect, because every third marble in a box is of a different colour.

The students are told the above, but they are not told which box is which. One box is picked and then the students are asked to pick up a marble, to have a look at it, but not to show it to others. The students are asked one by one to guess whether the box contained more black marbles or more white marbles. If you have a black marble in your hand and three students prior to you have guessed that the box contains more white marbles than black marbles, would you not change your opinion and perhaps guess that the box has more white marbles? The situation in which you rely more on the collective view than in your own information is known as an information cascade.

In the early stages of this millennium in around 2004 a common view in Finland was “what is good for Nokia is good for Finland”. I would argue that this was an information cascade. At the time Nokia was doing well and it naturally had a lot of lobbying power in Finland.

During the same time i.e. in 2004, I began to question the logic of transaction based pricing, which was the dominant logic on the mobile, but did not exist on the Internet. Indirectly and sometimes very directly, I was questioning the business model of Nokia. My personal experience and feeling from the time was that thinking which questioned Nokia, was not allowed. In particular, I felt, that it was not allowed at the Helsinki University of Technology at which I was working with my PhD thesis (present Aalto University).  I walked out from the Helsinki University of Technology and argued my thesis in Oulu University. My experience off course is very subjective.

Learning from the experience, however, I would argue that information cascades can be dangerous because they clearly can create a bias and can lead to situations where what one can think or say becomes limited. The Emperor´s New Clothes – a fairy tale by Hans Andersen, is only a step away. I would even go as far as to argue that we Finns are “a country of cascading information networks” - a feature which is present also in the international term Finlandization. In Finland we value consensus. With consensus we have a strong sense of direction. However consensus built on cascading information can be a dangerous choice.

Information is power and value is created to an increasing degree through information. It makes sense not to tell. At the same time openness is one of the buzz words of the information society. It is interesting to note that companies are required to be increasingly more open about their operations although at the same time their businesses are built on creating value through data. Companies have to find a balance between an increasing amount of data, creating value through data and with the challenges brought on by the demands of openness.

Withholding information can also become a problem. A conflict of interests might arise. For example withholding information could be in your personal interest or in the common interest of you and a few of your colleagues and perhaps not in the interest of your company and its stakeholders. For these reasons we have strict corporate governance principles.  

The public sector has through legislation controlled the private sector. Media has in turn had a role in monitoring the activities of legislators. I am concerned of what will happen in the public sector. On the one hand it will face the challenges of increasing the amount of data and using this data to redesign its operations. The public sector will also face the challenges of structural change. On the other hand the public sector will also face increasing demands for openness. The public sector is over 50% of the gross national product of Finland and I am also somewhat concerned that public sector governance principles are not up to date and that neither social media nor the traditional media have had the tools, including the understanding, to monitor what happens in public sector governance.  

In Finland we have had a case in which the prime minister Jyrki Katainen contracted philosopher Pekka Himanen to make a report on the future of Finland. This study was not open to competition and it also seems that both the Academy of Finland and the Finnish Funding Agency for Technology and Innovation felt pressured into co-financing the study (http://yle.fi/uutiset/tekes_would_have_put_himanen_research_out_to_tender/6512955). In another case there has been public debate on how the government should use ownership control in government controlled companies. The problem pointed out in the editorial of Helsingin Sanomat 16.10.2013 is that this control can be politically motivated. In one case the central party minister pressured the Finnish State Railways to contract railway carriages to ensure employment in the rural area and thus bringing jobs into their constituency. In another case the Finnish minister responsible for government ownership was forced to resign because as a member of the Green party it seems she wanted to protect the Arctic and was actively preventing the ice breakers from implementing their Arctic strategy.

These above actions can be regarded as inappropriate and they have surfaced through the media, including social media and at the end of the day they have had to face the scrutiny of public debate and public opinion. However what if we have seen is only the tip of the iceberg?  It would be foolish to assume that everything is visible or that everything will surface. The Finnish public sector is now facing structural change brought on by the internet i.e. the information age revolution. We do not use the word structural corruption in Finland, but I am sure that some of the established practices, which will emerge during structural change, will bring debate on what can be regarded as good public sector governance principles in the information era.   

Testing Operator Services - Case saunalahti

I have a subscription with Saunalahti. The price of the subscription I made one year ago would remain the same for one year and after that the price was due to go up. It was therefore time to renew my subscription.

The page oma.saunalahti.fi is relatively good. I can get feedback on my usage pattern and a recommendation on what I should buy.

One of the subscriptions I have is a heavy data user. On a single weekend the mobile device might and has consumed up to 7 Gbit of data. It was hence important for me that the use of data would be unlimited and available for the same flat rate monthly price with no degrading of speed i.e. service quality. This information was not readily available through the website and hence I called the customer service.

Service by phone is not readily available. I first waited for ten minutes. The person who answered informed me that he will transfer me to his colleague. He did not tell me that I would have to wait for a further ten minutes. Finally I got hold of a person who could help me. She confirmed twice if not three times that there is no data limit and no degrading of service to their data connection. I was happy with this and will probably be renewing my subscriptions.

However since service has moved to be provided through the Internet can I any longer trust what I am being told by phone? I neeed to learn some new skills. I need to learn to access subscription documents, read them and browse discussions on the net ask friends on Facebook etc. Buying services is no longer a question of looking the salesmen into the eye, or chatting on the phone, asking questions and deciding whether to trust the salesman and the company or not. Purchasing through the Internet is a new skill and it needs to be learnt.

I have also purchased a mobile certificate (mobiilivarmenne in Finnish). I have not realy yet found a place where I could use it and get comfortable with its use. Now I did. The website oma.saunalahti.fi is a good place to test. I tested by trying to log into the website using the mobile certificate. It took about 5 minutes before I was sent a message to my mobile phone and asked to verify myself. FIVE MINUTES is ridiculous and unacceptable. It should never ever be more than 30 seconds.

When a CEO does not understand his business

What happens when a CEO does not understand the business logic of the business he is in?

Do not get me wrong. I am not saying the CEO is an idiot. I am simply saying that he does not understand the underlying logic of the business he is running.

Think of it this way. A business is embedded in market competition. In the market a business develops its products and services to find perceived competitive advantage. A business is just as much a process of evolution as it is a process of understanding and engineering skill.

With evolution however it is chance and time which perhaps help in getting things right. Evolution is not about understanding.

Ok, let’s cut the theory and the philosophy and get to the case in point.

The CEO of Sonera (TeliaSonera subsidiary in Finland) Robert Andersson proposed that mobile data will be priced according to usage (Aamulehti 25.3). Seems reasonable doesn’t it? Well, he could not be more wrong.

One should remember that the Internet emerged as a process of evolution and one of the chance choices during the process, was that it was not priced based on usage. In fact if you look at the user profiles in Internet traffic you will notice that someone will be using his connection very conservatively (i.e. consuming very little data), somebody else will be using his connection extensively (i.e. huge amounts of data) and yet paying the same monthly fee. When observing even more thoroughly, one will note that some users are very connected and others less connected. Yet they are paying the same monthly price. It is this connectedness you need to make the Internet work. The users spin the web. The challenge is in creating a pricing method which allows for high connectedness, but does not need huge data consumption.

The Ceo of Sonera, as anyone else in the business, should be asking: why? Why did the Internet emerge with a model of all you can eat data? They should focus on understanding the above explanation.

I actually answered this question in my PhD in 2006 and in the interview by Howard Rheingold email, scale free networks and the mobile internet in April 2005, predicting that mobile will migrate TOWARD flat rate data and that flat rate is a prerequisite for the success of the mobile internet. Today mobile internet has become a success and there are more or less 500 million users with a more or less flat rate plan. Connecting people efficiently is a skill (almost an art) and some companies have clearly lost ground because they have not uderstood how to connect people efficiently. Nokia is a case in point.

The Ceo of Sonera wants to change this i.e. move to usage based pricing. Within the constraints of the logic of flat rate data i.e. ensuring that connectedness is preserved moving away from flat rate data is possible. These moves however should be so very slight and their affect to connectedness should be measured and understood.

The CEO of Sonera does not seem to have this understanding. He is basically following blindly other players in the industry (and this is not a way to create competitive advantage) by arguing that others have “bucket pricing”, "price caps" or "degrading of service speed" i.e. quality after a certain amount of data consumption has been reached. He is treading in difficult waters, without an underlying understanding. Let´s see what happens. Let´s also see what the customers will have to say.

It seems, that used based pricing, is actually only wishful thinking. In reality TeliaSonera has been very active in advertising that data prices throughout the Baltic and Nordic states (please check the fine print of your agreement) are fair and that you need not be concerned of an oversized bill, when roaming abroad. International data roaming is one of the last frontiers of usage based data pricing and the very reason why tourists do not use their mobile when abroad and the reason why operators in Finland recommend to their customers that they buy sim cards which do not allow data roaming abroad.

 

 

 

Why comparing prices does not make sense

Yesterday we were discussing the characteristics of the information economy in our class. I was using and referring to the book by Shapiro and Varian (1999) titled “Information Rules”. It is a great book, a true classic and in many ways very valid today despite the fact that it was written over ten years ago. It explains many of the characteristics of the information economy very clearly.

I wanted to make sure that at least in some way I was able to explain some of the ideas and concepts of the book. To do this I made a populist test by asking a question before I started the lecture and by repeating the same question at the end of the lecture. I told students that comparing prices makes no sense in the information economy. Then I asked how many compare prices? Everybody does. At the end of the lecture I repeated my hypothesis and once again asked the same question: how many compare prices? Once again everybody continued with comparing prices. It seemed that no change had taken place. Had my lesson gone to waste? Or was I barking up the wrong tree?

The point Shapiro&Varian make in their book is that the fixed cost of producing information goods are both large and sunk. The fact that the cost is also sunk means that it is very difficult - practically impossible - to retrieve the cost one has invested in making an information product. For example if you have invested hundreds of hours in writing a book and the book does not sell, there is no way you can retrieve the cost of your investment i.e. get paid.

Shapiro&Varian point out that the variable cost of information production also has an unusual structure: the cost of producing an additional copy typically does not increase even if a great number of copies are made.

From these characteristics of information goods Shapiro&Varian conclude 1)“Information markets will not, and cannot look like text book perfect markets in which there are many suppliers offering similar products, each lacking the ability to influence prices”, 2) low variable cost offers great marketing possibilities and 3)they instruct companies to avoid commoditization.

My populist conclusion from all of this was: “comparing prices does not make sense”

One should and this I was trying to explain to the students be very aware that at best pricing can be very personalised. Even shops and supermarkets could have different prices in the morning and different pricess in the evening. At best they could have a price specifically tailored to you i.e. when you walk in the shopkeeper decides instantaneously whether to give you low medium or high prices. Of course in a physical environment this does not really work.

In the virtual environment personalised pricing is very possible and often the norm and by versioning products and services one can make the product look different and hence avoid price comparison and commoditization and from the perspective of the consumer this leads to the statement that there is not necessarily much sense in price comparison.

What should the consumer do? Well in my view he should be very aware that prices can fluctuate in the information economy. He or she should also have a general understanding of prices and price levels. In particular he or she should focus on what the value of the product or service is to him or herself and to express the value also in money. Then all the consumer needs to do is wait until somebody has a promotional price which is acceptable to the consumer and once this happens: grab the deal!

Why free education creates a market of non consumption?

In Finland we are proud of our free education system. However we should also be concerned. About 93-95% of the generation continue to a professional or university degree (for free) after they have finnished their obligatory education at the age of c 15. However we should also be concerned because only 86,8% get a degree. In other words we have a drop out rate of 6 to 8%. This is high and a should be a major concern.

One should note that, the fact that education in Finland is free, does not make Finland any better compared with others.When comparing Finland with other OECD countries, Finlands performance of 86,8% with a professional or University degree is only average (Helsingin Sanomat 12.9). Could it be that a free education system is also a barrier?

The consultancy company Innosight describes how you can create a business model that unlocks an unserved market. It is natural to think that developing countries can be underserved, but one should also consider if developed countries like Finland could be underserved because they have structures, barriers and cultural habbits, that prevent new ideas and new forms of business emerging. In particular in the context of education, one should ask can free education be a barrier?

Closer inspection would show that education in Finland is not totally free. For example high school students - in practice their parents - have to buy their school books (some stimates say this is about 1000 euro, when bought new). Nevertheless we have a culture of free. We are not used to paying for and investing into education. The high school students have this mental mindset when they enter University and I would hypothesise that the Finnish University student buys less books than his foreign counterpart. I would love somebody testing this or coming back with empirical evidence.

This culture of free is also affecting how students invest in IT technology, which is central to modern learning. Today each student buys his or her computer, but mainly because they need it for personal entertainment and social networking not beacuse they need it for school.

Students, however, do not invest in professional software, although as we all know  two thirds of IT costs are in software and not in the hardware. This is clearly a market of non consumption, as Clayton Christensen, the Harvard professor, would call it. Interestingly Universities are facing budget cuts, because of a low performing economy and they too would hesitate in investing more in IT.

The question is how do we build a market in which we teach students to invest in software and at the same time test out different software or etools as I would call them. I have some ideas. And hopefully I will get back to you with them, some time later on.

I started the blog entry by being concerned with the 6 to 8% drop out rate. I understand the figure is high, but it is not  my biggest concern. My biggest concern is the fact that in Finland we are not learning the e-tools that are needed to run a modern business.

Why universities do not have web shops?

Some time ago I was wondering why the large Finnish retail shops like the S-group, Kesko and Stockmann do not have a web presence, why they do not have a web shop.  Now, a few years later, all have established some sort of web presence (e.g. http://www.kesko.fi/fi/Kaupat-ja-palvelut/K-ryhman-kaupat/verkkokaupat/  and http://www.s-kanava.fi/web/vk/en/asiakasomistajalle). The latest is the S-group and you can see their web shop advertisements when visiting the local Prisma supermarket.  

The reason for the rush into establishing a web shop and a web presence is simple: customers are on-line and ready to buy. Not having a web presence means a sure risk of losing market share.

The retail shops were late in establishing their web shops because their business logic was built around the local community and on the logic of securing the best physical presence, in practice an intersection of major roads, to build a physical store. The retail shops had focused on physical intersections and forgotten the virtual intersections. Now they are learning how to conduct an online business and they are learning that underlying business principles and structures will be questioned by the customer. The customer drives their business.

In a sense universities are similar to retail shops. Universities are built around the local community to serve the knowledge needs of the local population. Education in Finland is free. It is not the customer – the student – who brings in the money. It is the government who pays for the tuition. In this sense Universities are different to retail shops. However Universities should pay attention and note that students are online and that they are also learning online. The Finnish retail stores were late going online. The Finnish universities will be slower. Hopefully they will not be too late in creating an online presence.

Internet i.e. online business is different to physical business. Internet based business models have four interesting characteristics: search engines are key, tools are given to the user to enable interaction, one should focus on building a community and the business model is scalable.

An online university could be compared to the hotels.com application. It is easy to find a hotel room anywhere in the world. It should be as easy to search for an online course starting within a single university and then build to leverage interuniversity relationships. One should give the students tools to openly comment and recommend the course to other students. Why not, while at it, also give the alumni and industry members interactive Internet based tools to comment and suggest content and areas of future development for the course.  In Finland tax payers are paying for the tuition. Following the principles of open data, tax payer financed content should be available to all – and not just the students in class. Like in many Internet business models, the lectures could be open to all in the online community and personal (possibly also online) feedback plus discussion, course grading’s, certificates etc. to those who have paid for the course or are enrolled as students.

It is interesting that the Internet was born in university related research environments, but the universities are among the last to notice the Internet´s potential in changing their business model and their governance structures.

 

 

What tools do students need and how much do they cost?

In Finland school is free, except for the books, which the student at high school level has to pay for. A yearly debate is, whether or not also these books should be free or not. Helsingin Sanomat (http://www.hs.fi/digilehti/#15082012/kotimaa/ ) calculated how much a student has to pay all together during three years at high school, if he was to invest into new – not used – books. The total sum is 1972 Euro´s.

In today´s information society almost every family has a personal pc and I would assume – not knowing the statistics – that a majority of high school students have a personal laptop. This is an investment which they should also have for school purposes. A sum of 500 Euro´s should be added onto the 1972 Euro´s invested into books.

Thinking on a bit further, do the books need to be printed versions? Could they not be e-books or even integrated into the e-learning platforms of schools.

It is also surprising that there was no discussion on the e-tools (e.g. software programmes) students need to buy and how much they need to spend. Every computer most probably has a Microsoft office package, which has a price tag. But how many schools and students are using Google applications?