Rational exchange is dead. Take that, Adam Smith. That’s right — people don’t make rational decisions in business anymore.
What is the cause of this? It’s the great tsunami of information. There’s so much information out there now that it has become nearly impossible for an economic agent to act rationally using all available data. The art of choosing what not to pay attention to has become more important than the science of choosing what to pay attention to.
Rational decision making is easiest when there are limited options available. If my girlfriend and I have to choose between five restaurants, I can cook up a mental model comparing the set across the weighted metrics of price, distance, and sumptuousness. The decision-making process is fairly simple in such circumstances: the option that “earns the most points” across all metrics is the one we choose. But the Information Age rarely poses such simple options. For all the big decisions— career, life partner, education, city to live in, hobby to study — we are continuously bombarded with options, paralyzed by the saccharine anesthetic of possibility.
Enter…the Gut. When we’re faced with a decision more complicated than, for instance, picking the best taco shop, then we are most inclined to trust our intuition. Some say that our gut or intuitive sense is actually far more intelligent than our rational mind. Many creatives, writers and artists agree, as do advertisers, marketers, and social media companies.
But the Gut is under attack. Addictive technologies fire off dopaminergic artillery blasts by the hour. Manipulative advertising campaigns slither behind their encampments. We are in the midst of a total war on the traditional rational-agent theory of economics, the Smithian school, occasioned by the most complex society in human history. Behavioral economics is now the dominant school of thought, whether we like it or not. In such an age, the businesses that can tell the best stories, that can best pull on our heartstrings and speak to our deepest desires, will win — not necessarily those with the best product-market fit, or most rational business model. Often, it is the non-rational models that are proving most successful — the luxury car maker that profits off your desire to feel morally superior to your friends and family, or the sweater brand that brings you into tears, hand on your wallet, to help support impoverished shepherds in Uzbekistan.
“Free” services, such as search or social media, are the most insidious at capitalizing on these less-than-rational decision-making processes. The rational exchange model has been entirely turned on its head. Now one exchanges what feels like nothing — simple information — for access to a service that seems to improve their life. Of course, they are being addicted to said service, and recent studies suggest that this addiction actually results in an increase in loneliness and a decrease in fulfillment.
I do not believe that these models will continue to dominate the industries of the future. They are essentially a con, given that many users don’t understand that they’re being taken advantage of. Cons don’t last long. Ask Bernie Madoff. Recent outbursts of public frustration and scintillating floor-to-floor media coverage show that cracks are emerging in the friendly façade of “free.”
The winners of the future, I believe, will be fully transparent about their business models. In an era of unprecedented information and translucence, it is almost impossible not to be. While behavioral economics is certainly here to stay, people don’t like feeling irrational or out of control. It is a deep human need to have a sense of dignity and respect. Companies that follow through on that, that provide a rational and clear exchange of value, that resurrect the values of Adam Smith yet respect the teachings of the behaviorists, are best positioned to rule the roost in the industries of tomorrow. The public will demand it.